U.S benchmarks are pulling back from Friday’s rip higher as optimism over U.S.-China trade deal fades, writes Bill Baruch, President of Blue Line Futures.
E-mini S&P (March)
Last week’s close: Settled at 2671.50, up 36.25 on Friday and up 76.50 on the week
Fundamentals: U.S benchmarks are pulling back from Friday’s rip higher. Positive tailwinds on trade have dissipated a bit, the IMF warns of slower growth, fourth quarter earnings kick into high gear this week, the government shutdown remains at a stalemate and the Brexit brings a world of questions. Last week, it was reported that the U.S was weighing lifting tariffs on China. Although these reports were almost immediately denied, it began a strong move higher. On Friday, China came to the table with a plan to eliminate the lopsided trade balance over six years. This boosted the S&P 500 to the highest level in over a month. These reports are certainly going to have an upbeat impact on the market, but the fact remains, there is no substance. Is the U.S going to allow China six years to close the gap? Furthermore, this doesn’t address key issues such as copyright infringement. The impact this news had was exacerbated by the simple fact of repositioning, which we have spoken of for two weeks; those trapped shorts from 2550 and lower are now squeezed out and under-positioned portfolio managers have chased higher. Overall, this jawboning was expected ahead of next week’s trade talks, but it was also able to hit a pressure point for this market.
Although global equity markets are in recovery mode since the Christmas lows, it doesn’t change the facts; growth is slowing. On Sunday, China’s growth figures were the slowest in nearly three decades. The IMF used this opportunity to lower their global growth forecast for 2019 from 3.7% to 3.5% citing trade tensions and rising interest rates. The World Economic Forum in Davos has kicked off and we are likely to hear more on this topic as the week unfolds.
Today is day 32 of the U.S government shutdown and the White House said every week that this goes on decreases GDP by 0.1%. Furthermore, the economic calendar is sliming which makes it harder to understand where U.S growth is and next week’s Q4 GDP report is all but postponed. Durable Goods data is the latest casualty; however, we do get Existing Home Sales at 9:00 am CT. This sheds additional light on an already pivotal earnings season. Halliburton (HAL) and Johnson & Johnson (JNJ) are both down about 1.5% after reporting this morning and IBM leads after the bell.
Lastly, a world of questions surrounding Brexit will not help the risk-appetite; U.K Prime Minister May is trying to find support for her Plan B after a historical defeat last week while the opposition party is pushing for a second referendum on leaving the EU. A hard Brexit in March would certainly be detrimental to global markets but going back to the polls could easily have the same effect.
Technicals: On Friday, we neutralized our bias in a wait and see mode given the news flow and short-squeeze but did not deter from our exhausted rhetoric. With the market extended on Friday, we began reintroducing our bearish bias at the trade desk as it neared our rare major four-star resistance. Repositioning has brought a vicious tailwind, one that we feared as price action extended above 2600. However, we still see the upside extremely limited in the near and intermediate-term. Today, minor support comes in at 2643.75-2646.75. Below there is major three-star support at 2632-2635.25; this aligns multiple key technical indicators including the gap close from Thursday and we expect this level to get tested over the next 24 hours.
Bias: Neutral/Bearish
Resistance: 2686.50-2690.50**, 2706-2715****
Pivot: 2656.50
Support: 2643.25-2646.75*, 2632-2635.25***, 2619.25-2626.50**, 2602.50-2605.25***
Crude Oil (March)
Last week’s close: Settled at $54.04, up $1.68 on Friday and up $2.13 on the week
Fundamentals: Crude oil is a dollar from Friday’s settlement with the February contract falling off the board today. China’s GDP figures on Sunday were in line with expectations but still at nearly 30-year lows. The IMF responded by giving a stark reminder growth is slowing, they lowered their 2019 and 2020 forecasts. We have also seen tailwinds for risk-sentiment dissipate a bit in this new week. Monday’s holiday pushes out inventory data with API after the bell tomorrow and the official EIA data Thursday. These numbers will come at a pivotal time as price action has run into a wall of resistance and the jawboning from both OPEC and on the U.S-China trade front begin to dissipate. We maintain that crude oil cannot breakout above $55, but will hold $50 without seeing a change in the inventory trend.
Technicals: Price action is developing a sharp reversal on this extended-hours holiday session. First key support comes in at $52.81-$53.03, this is a strong level, however, too high in order to be a major three-star support. Below here, second key support aligns with Friday’s low and a move through here would secure an outside bearish pattern. We have introduced a bearish bias and only a close back above $54.04 will negate this potential rollover.
Bias: Bearish/Neutral
Resistance: 54.04**, 54.55-54.98**, 55.51-55.55***
Support: 52.81-53.03**, 52.13-52.37**, 49.98***
Gold (February)
Last week’s close: Settled at $1,282.6, down $9.70 on Friday and down $6.90 on the week
Fundamentals: Gold traded lower through the holiday trading hours Monday and is attempting to stabilize this morning. The U.S Dollar Index remains elevated which is weighing on gold, but the metals weakness comes more so from the Chinese yuan which has lost ground for four straight sessions tallying about 0.5%. This does not fundamentally change our narrative; we remain unequivocally Bullish Gold.
Technicals: We have pounded the table on capitalizing on recent strength in order to welcome potential weakness. That weakness is beginning to arrive, and price action is battling at first key support at $1,278.1-$1,282.3. Traders must prepare to buy into major three-star support at $1,260.8-$1,263.8. Our momentum indicator today comes in at $1,279.7 and it is favorable that price action is above here, however, only a close out above $1,289.6-$1,292.3 is bullish in the near-term.
Bias: Bullish/Neutral
Resistance: 1289.6-1292.3**, 1298-1300***, 1313-1320**
Support: 1278.1-1282.3**, 1270.3**, 1260.8-1263.8***, 1250-1256.4**, 1245.3**, 1236.2-1236.7***
