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Is the Treasury Pulling the Kool-Aid?

By:

President of Blue Line Futures

E-mini S&P (December)

Yesterday’s close: Settled at 3580, up 15.00

NQ, yesterday’s close: Settled at 11,987.25, up 90.25

Fundamentals: Generally speaking, the Morning Express attempts to lay out the fundamentals that we believe ‘are powering’ or ‘will power’ a path of least resistance over the day, week, month, and quarter. We further detail how the technical landscape will either provide a tailwind or headwind and specific levels that would trigger buying or selling. In recent weeks, we have discussed how less uncertainties after the U.S. election, ultra-accommodative central bank policy, and overall upbeat data (earnings, jobs, and GDP) have and will power U.S. benchmarks to new record highs with technical levels that they must maintain in order to do such. Overall, we describe this as cautiously Bullish in Bias. What does that mean? We are buying dips in futures against levels of technical support and are allocated healthily long in equity investment portfolios. However, our caution at elevated levels encourages continued attention and requires hedges at times.

U.S. benchmarks battled exhaustion and negative headwinds through Wednesday to finish lower (see Thursday morning’s note). Still, we cannot ignore that the uptrend is intact, and levels of technical support yesterday held perfectly; this allowed for a strong finish to the session. After settlement and ahead of the electronic close, selling quietly kicked in. In fact, the S&P slipped 0.5% and the NQ 1% from settlement to the electronic close. What happened?

U.S. Treasury Secretary Mnuchin sent a letter to Federal Reserve Chair Powell requesting a partial winddown of the pandemic liquidity facilities. Ultimately, the maneuver is best described by extending four of the liquidity facilities by 90 days and setting those tied to the CARES Act to expire on December 31, 2020. To be clear, he is requesting the UNUSED funds to be returned to the Treasury. This is not a request to liquidate the facilities in place and securities owned by the Fed. He further said that the Fed could request to reestablish these facilities if the “unlikely” need occurred again.

Risk-assets sold off sharply on the misunderstanding that the punch bowl was being taken away in a disgruntled transition of power. Although this is clearly not the case, and they have since recovered, it does present an added hurdle over the coming weeks and months.

Are we less Bullish in Bias today? Not necessarily, but we are more cautious in that Bias. Ultimately, this increases the importance of a technical floor, discussed more in the Technical section below. If such is violated, we could see an increased willingness to de-risk given this new potential headwind.

Technicals: Yesterday’s hold of technical support allowed the S&P and NQ to each trade north and into their respective major three-star resistance levels. For the S&P, this is 3582-3586 and for the NQ, this is 12,062-12,098. A close above these levels today will reaffirm a path of least resistance higher across all timeframes, adding a bullish tailwind to finish out the week and further set a strong tone heading into next week’s Thanksgiving holiday where such tailwinds in light volume could be extrapolated. Support below the market has proven to be strong. The NQ tested and held a significant level at …. Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Crude Oil (January)

Yesterday’s close: Settled at 41.90, down 0.11

Fundamentals: Crude Oil looks to finish out a very constructive week. One that battled a soft close one week ago and potential demand deterioration as the second wave of the Covid-19 pandemic rages on. Furthermore, Crude Oil withstood weakness across risk-assets on the misunderstood letter from U.S Treasury Secretary to Federal Reserve Chair Powell. The major focus over the next week and a half, as we have pointed to, will be the start of the OPEC+ meeting on November 30th. The market seems fairly certain they will at least delay their production cut taper, and this has buoyed the tape, helping it battle those other headwinds. The question then becomes, will they take added supply off the market given those headwinds? If that answer is yes, we find $45-46 in the cards.

Technicals: Although Crude Oil is struggling to chew through major three-star resistance at 42.15-42.36, it has traded very constructively building higher lows. It has further held first key support at 41.30 since rallying Tuesday morning. Our momentum indicator comes in at 41.86 and we will look to continued action above here today in order to pave a break above major three-star resistance at 42.15-42.36 and a move to … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Gold (December)

Yesterday’s close: Settled at 1861.5, down 12.4

Fundamentals: Gold has battled continued waves of liquidation. In fact, the Managed Money Net-Long position in Gold has floundered over recent weeks at a level last seen before the June 2019 rally that regained $1300 and traded straight to $1400 within the month. Managed Money accounts for the speculators and hedge funds who are considered to also have the weakest of hands. This is an indicator that we want to fade; if they are selling, the time to buy is quickly approaching. The latest Commitment of Traders comes out this afternoon for the week ending this Tuesday. Through this liquidation, Gold has held a great technical landscape, and this lays a beautiful groundwork for the start of a bullish seasonal trade in the second half of December.

Yesterday, we pointed to a supply crunch in Platinum. It has extended gains trading at two-month highs. Keep an eye on this momentum as it has been a laggard and could really play catch up in 2021.

Technicals: Given the choppy to lower trade, but constructive, our momentum indicator has slipped slightly. However, this allows for a lower bar that Gold must hurdle, and it is doing such this morning at 1863. This paves the way for strength through the close. We must see a close above 1878.9-1880 at minimum. A close out above 1893 will begin to invite added buying, but a close above 1907 is needed to fully neutralize the latest leg of weakness. Over the long-term, Gold is building a very nice bull-flag or pennant on the weekly and monthly chart and as we have noted, it sets up terrifically for a move to …. Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Originally Posted on November 20, 2020 – Is the Treasury Pulling the Kool-Aid?

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