Further weakness in equities continued overnight, reports Bill Baruch.
E-mini S&P (ESH)
Yesterday’s close: Settled at 3110.25, down 22.25
Fundamentals: The cleansing continues; the S&P 500 hit an exact 10% correction late last night. Although the velocity of this move may seem concerning in the context of an ordinary market; the move itself is anything but concerning to this point and the market is certainly not ordinary. What is concerning though is the unknown impact to earnings and the supply chains of what were otherwise healthy growing companies.
Last autumn, the Federal Reserve began expanding its balance sheet. It has been increased by 10% and although leveling off over the last month, back to levels last seen in October 2018 during Quantitative Tightening. Because of that aforementioned unknown, rates have stayed low and are likely heading lower. In fact, the back half of the Treasury curve is setting new records. Earlier this week, Bill Baruch laid out a path of least resistance in the 10-year Treasury note price to 136-00 or 0.88% and in the 30-year Bond price to 176-00 or 1.33%. Each major interest rate derivative extended its path overnight as the odds for a Federal Reserve rate cut has risen to better than 50% at their March 19 meeting and better than 85% by April 29. Will the Fed again come to the rescue?
The spread of Covid-19 (the technical name for the Coronavirus) outside of China is in the driver’s seat. The death toll in South Korea, Italy and Iran has risen to 13, 12 and 19 respectively. The number of infections has now topped 1,500 in South Korea. Also, denting sentiment are 60 confirmed cases here in the United States.
Back to supply chains, Microsoft (MSFT) issued a sales warning as it expects demand for its operating system to slow. PC makers are ultimately delaying building new computers because of disruptions in China.
On the economic calendar, the second look at Q4 U.S GDP was in-line with expectations. Durable Goods Orders was not as bad as expected for January and December’s figures were revised higher. However, Initial Jobless Claims rose more than expected.
Technicals: The tape is ugly, there is no doubt about it. However, there are massive levels of support being tested. The most crucial is our rare major four-star support in the S&P 500 at 3029.50-3057.75. This level aligns an exact 10% correction with the 200-day moving average and the previous July/September plateau. It is important to understand that all bets are off upon a close below here and volatility could get uglier as the S&P 500 has only closed below the 200-day moving average three times since ripping back above it last January (once in March and twice in May). As for the NQ, it is flirting with a critical level of support.
Crude Oil (CLJ)
Yesterday’s close: Settled at 48.73, down 1.1
Fundamentals: Crude oil is falling precipitously. Think about this, 8% to 10% of crude oil is used to make plastic. Where does the vast majority of plastic and plastic products come from? Asia and China specifically. If factories are shutdown, we are talking about multiple demand channels of crude being shut down. This is the demand deterioration that headlines have been eluding to, but now, there is a very bearish technical tailwind. Yesterday’s headline inventory data was actually bullish with a composite draw of 4.353 million barrels. However, Refinery Utilization more than expected and a fear for lack of demand. Now, OPEC+ is meeting next week and this brings a wildcard.
Technicals: Crude oil has broken below a massive trend line dating back to February 2016 and one that had buoyed the tape for a month. The technical break below here has brought aggressive waves of selling and the next level of support is our major three-star level.
Gold (GCJ)
Yesterday’s close: Settled at $1,643.1, down $6.90
Fundamentals: Gold battled waves of weakness yesterday and is snapping back this morning. Continued strength in the Treasury market coupled with a weaker U.S. dollar is a perfect recipe for gold. The data this morning, Durable Goods Orders and Q4 GDP, was stronger than expected, however, it takes back seat to the broadly deteriorating risk-sentiment. Traders should read our S&P 500 technical section to fully understand the levels of long-term support in the major U.S indices that could help buoy the risk-environment. The other factor that could lift such risk is action from the Federal Reserve. Odds for a cut at their March 19 meeting are nearing 60% while odds for a cut by the April 29 meeting are nearing 90%. This Fed-cut narrative is driving safe-haven assets higher.
Technicals: Gold came within an eyelash of pinging our major three-star support and downside target in gold at $1,615 to $1,619.6. There is a large shelf of support from there and down to the psychological $1,600 mark that aligns technical indicators. The bulls are back in the driver’s seat with price action above our momentum indicator that now aligns with previous levels.
Bill Baruch provides technical levels on all markets throughout the week at BlueLineFutures.com. Sign up for a complimentary two-week trial of 1 or all 6 of our daily Blue Line Express commodity reports!Please sign up at Blue Line Futures to have our research emailed to you each morning.
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