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Is a Deflationary Environment Building?


President of Blue Line Futures

E-mini S&P (June) / NQ (June)

S&P, yesterday’s close: Settled at 4225.50, down 2.75

NQ, yesterday’s close: Settled at 13,804.25, up 37.50

Fundamentals: Just as last week culminated with Nonfarm Friday, this week builds up into Thursday’s monumental inflation data, ECB meeting, and Initial Jobless Claims. Portfolio managers and traders want to be long risk-assets such as stocks and commodities, but fear inflation that has begun to run hot. Last week, strong headline ISMs coupled with a private ADP survey print of nearly 1 million jobs added in May forced some unwinding. As soon as Nonfarm confirmed tepid job growth that was not in the 1 million range, those portfolio managers and traders quickly repositioned. Yes, job growth for May was only 559,000 and expectations were only 650,000, so why did we just point to 1 million as being the benchmark? Not so much because of ADP, but instead of the feared hot read.

We have reiterated this ad nauseam, but will again; we applaud the Federal Reserve, they have been right, job growth remains well below their expectations, they believe a rise in inflation through the summer will be transitory, they implemented symmetrical inflation targeting last year, and they want to be behind the curve. What does this all mean? Simply put, job growth and inflation within the range of expectations will be viewed as a green light for risk-assets in the manner a data miss otherwise would have. At this point, the Federal Reserve wants to remain patient before tapering their bond purchases and certainly will as long as job growth does not surge at a pace of 1 million per month and inflation, by their metrics of course, does not run hot. In fact, we further believe the Federal Reserve is looking for a reason to delay taper talk until inflation reads for July and August (in August and September), when base comparisons began dramatically improving out of the deflationary window of April through June 2020. Why? Not only because they said they want to be behind the curve, but we could actually see DEFLATION at this time. Yes, surges from April through June due to reopenings and low base comparisons could bring peak inflation.

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What does this all mean, and how do you trade it? Just as we said Friday’s jobs data was a green light, a turnaround Monday that did not turnaround now brings a green light that could last through the first half of Wednesday, before those same portfolio managers and traders begin unwinding excessive risk once again ahead of Thursday’s 7:30 am CT data dump.

Technicals: A very unenthusiastic session yesterday turned better in the final hour. This was because price action simply held ground; turnaround Monday did not turnaround and a path higher was forged. This strength in the NQ pushed it through major three-star resistance at 13,790-13,818, a level that has acted like a ceiling in recent weeks. However, the S&P still faces the tall task of clearing strong, rare major four-star resistance, aligning with its record high. This brings an emphasis on our Pivots which are our momentum indicators that also happen to align with points of significance. For the S&P, it aligns with unchanged on the session but also roughly where the market failed last Monday, the first day of June, on the opening bell; continued action above 4226 signals that yesterday’s late strength was real, and the bulls are in the driver’s seat to new record highs. For the NQ, this is also the ceiling of resistance over the last two weeks; it is very bullish when previous resistance becomes new support. Lastly, let us not ignore the very bullish cup and handle patterns for each index developing and that our rolling 12-month target in the S&P is 4620. Therefore, we have taken an outright Bullish approach as long as price action holds our Pivots.

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Bias: Bullish

Resistance: 4238.25-4241.50****, 4247.50**, 4287.50**, 4294.75***, 4318***

Pivot: 4226

Support: 4213-4215**, 4206-4209.25***, 4197**, 4186-4191.25****, 4173.50**, 4163.25**, 4150-4154***

NQ (June)

Resistance: 13,953**, 14,035-14,064****

Pivot: 13,790-13,818***

Support: 13,715**, 13,686**, 13,605-13,620***, 13,543-13,570**, 13,460-13,493***

Crude Oil (July)

Yesterday’s close: Settled at 69.23, down 0.39

Fundamentals: Crude Oil has continued a retreat after tapping $70 and the achievement has forced the tape to digest last week’s gains ahead of Iran nuclear talks and weekly inventory data. At the onset of this new week, weak China data Sunday night set the market back, but there is certainly a belief significant progress will be made in Vienna later this week. This comes although officials have said some of the “hardest decisions lay ahead”. Additionally, there has been tremendous emphasis on the summer driving season in the U.S. and mounting demand expectations. As weekly inventory expectations trickle out for the week of Memorial Day weekend, it pins Gasoline demand front and center, and some market participants fear such expectations may have gotten ahead of themselves. Considering both narratives, they certainly invite risk management, but we still lean on the market digesting its recent climb higher as the overwhelming factor driving the tape.

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Bias: Bullish/Neutral

Resistance: 70.00***, 71.34**, 72.70**

Pivot: 68.87-69.05

Support: 67.98-68.19**, 66.45-66.70***

Gold (August) / Silver (July)

Gold, yesterday’s close: Settled at 1898.8, up 6.8

Silver, yesterday’s close: Settled at 28.018, up 0.122

Fundamentals: Gold and Silver are ping-ponging in a range of 1% and 2% respectively. On the positive front, Treasury prices have continued to leak higher, and this is a very supportive backdrop for precious metals. However, the U.S. Dollar is broadly higher against everything from the Euro to the Aussie and the Chinese Yuan. As we discussed at length in the S&P/NQ section, we believe portfolio managers and traders want to be long commodities but must prepare for a hot read on jobs and inflation. Participants prepared for Nonfarm Payroll by peeling back risk, and we could see this happen ahead of Thursday. However, we believe that Friday’s tepid job growth gave risk-assets a green light into the first half of Wednesday, but they must hold strong technical construction.

Technicals: Gold stuck its nose and closed above major three-star resistance at 1894.5-1896, but not decisively, and decisive is important given technical damage last week that brings strong key resistance at 1903-1905.3. Gold traded to a high of 1906.9 this morning before slipping. The recent range, weekly settlements and rising momentum indicator create a very tight point of balance, and this explains Gold’s ping-ponging range; first key support comes in at 1887.5-1892, whereas out momentum indicator aligns within the recurring 1894.5-1896 pocket that serves as our Pivot. Silver will follow Gold’s lead but has struggled at first key resistance. If Gold performs, we believe Silver will and then can outperform, but we want to see it stay constructive above first key support.

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Bias: Bullish/Neutral

Resistance: 1903-1905.3**, 1912-1914.3***

Pivot: 1894.5-1896***

Support: 1887.5-1892**, 1875-1877**, 1862-1864** 1843-1850***

Silver (July)

Resistance: 28.01-28.10**, 28.47-28.55***, 29.36***, 30.00

Pivot: 27.90 Support: 27.59-27.68**, 27.36***, 26.94***

Originally Posted on June 8, 2021 – Is a Deflationary Environment Building?

The support and resistance levels are created through our systematic and proprietary technical analysis and ranked by significance from 1 to 4 stars (****). 1-2 star levels are typically best focused on intraday or early in a session to help confirm momentum. 3-4 star levels are used to define a floor or ceiling in a market, a move and close above or below could signal a breakout or breakdown.

Our bias is our outlook for the underlying market, with 7 separate rankings from outright bullish to outright bearish.

Bullish – Outright bullish

Bullish/Neutral – Bullish the market but there may be technical/fundamental headwinds around the corner

Neutral/Bullish – relatively upbeat from a cautious standpoint 


Neutral/Bearish – relatively downbeat from a cautious standpoint

Bearish/Neutral- Bearish the market but there may be technical/fundamental headwinds around the corner

Bearish – Outright bearish

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