The Holiday Melt-up Was Just That and We Are Likely to See Continued Volatility

Yesterday’s tech bloodbath should not have come as a surprise, states Bill Baruch, president of BlueLineFutures.com.

E-mini S&P (December) / NQ (March)

S&P, yesterday’s close: Settled at 4784.25, down 1.75

NQ, yesterday’s close: Settled at 16,275.75, down 209.75

Fundamentals: We have been warning the holiday melt-up was just that and we are likely to see continued volatility at the onset of the new year as the focus of market participants shifts to the Federal Reserve’s path of tightening. The yield on the 10-year Note has risen to a high of 1.686% and is directly in the spotlight today. Not only because there was technical resistance established in Q4 at 1.65% to 1.70%, but because the Federal Reserve releases the Minutes from their December 15 meeting at 1:00 pm CT. Leading up to this meeting, Chair Powell and the committee raised the bar for hawkish expectations, but the policy announcement was lauded as coming in less hawkish. At least, we can say it was not more hawkish and this was used as a risk-on positive. Also, it was partially digested as such because of uncertainties surrounding the surge in Omicron cases. Still, markets whipsawed dramatically as they digested the news. At the end of the day, seasonality won and rightfully so, as the S&P 500 (SPX) ripped to a new record high.

The holidays are in the rear-view mirror and bonds have been crushed. What may actually be surprising was that yesterday’s fallout in tech did not happen on Monday when the 30-year bond was bludgeoned for two-and-half points. It is our belief that such moves in the bond market, when they occur in the 4th through 1st quarter are typically not a two-day event and are more prolonged. Today, could be a defining moment. Despite record case counts, that data has proven Omicron to be as mild as the flu. This morning, ADP Payrolls blew the doors off, doubling expectations at 807k jobs added versus 400k. Both the price (futures that we trade) and yield of the 30-year bond have taken out levels from Wednesday ahead of Thanksgiving, before Omicron. However, the price and yield of the 10-year have not yet. Today will prove pivotal in this landscape and everyone must take note.

Technicals: Three things happened yesterday. First, the NQ incurred heavy selling on the opening bell that has become a precursor to multi-session and multi-week bats with volatility. Second, from both a settlement basis and an intraday basis, the NQ opened above Monday’s close and closed below Monday’s low. This is as textbook an outside bearish day as it gets. Thirdly, the S&P opened at a fresh record high, at major three-star resistance, and quickly failed, trapping longs. These are bearish occurrence, at least for the near-term and signal the market has something boiling to work through. We have now gone outright neutral and will look for two-sided swing opportunities. Yesterday, the S&P barely came within 0.5% of Monday’s low, whereas the NQ surpassed it by about 1%. Major three-star support in the S&P remains at 4740.50-4747.50, aligning multiple indicators with previous record highs. The NQ is decisively below previous major three-star support, now resistance, at 16,275-16,325 and faces continued selling while below here. The good news, it is being buoyed by strong support at 16,170-16,214.

Crude Oil (February)

Yesterday’s close: Settled at 76.99, up 0.91

Fundamentals: Crude oil is stretching to a new swing high and attempting to chew through our big level of resistance defined at 77.44-77.81. This is arguably the fifth attempt, with each wearing down the defense. It may seem the private API survey from last night helped bring a bullish tailwind after the group reported a headline draw of crude at 6.432 mb versus analysts' estimates for today’s official EIA report at 3.4 mb. However, this headline was offset by massive builds of 7.061 mb of gasoline and 4.34 mb of distillates. Much larger than the +1.775 mb and +1.525 mb estimated for EIA, respectively. Ultimately, we find the market’s buoyancy due to seasonality and an extremely tight physical market as more data supports Omicron as no different than the flu. When crude oil was down this morning, the back months were down more than the front by 10-20 cents. This may seem insignificant but exudes the tightness and growing demand. On that demand front, China has come across as very active, re-inflating to starting the new year.

Technicals: We maintain our more bullish bias, but we must see a close out above major three-star resistance at 77.44-77.81 today. Traders must also take caution into today’s EIA report. The steady climb has helped create multiple shelfs of key support, denoted below. Additionally, our rising momentum indicator aligns with previous key resistance.

Gold (February) / Silver (March)

Gold yesterday’s close: Settled at 1814.6, up 14.5

Silver, yesterday’s close: Settled at 23.056, up 0.246

Fundamentals: Despite a failure to start the year, gold and silver bulls have shown up. Furthermore, as we noted here, they are fighting Treasury headwinds after the 30-year bond collapsed by three whole points to start the year. On the other side of things, the US dollar weakness since yesterday has helped buoy commodities. Today’s FOMC Minutes release will prove pivotal and could become a headwind if committee members could be seen as more hawkish given evolving conditions in the last three weeks. However, it is very notable that gold surged upon the October CPI release in November and traded higher today after ADP Payrolls blew the doors off with 807k jobs versus 400k expected. Listen, a hawkish Fed and higher rates will be a massive headwind for gold, but if investors are staying ahead of the curve and looking to slower growth in the coming quarters, gold could become very attractive. Furthermore, managed money is significantly under-positioned for a move, therefore, strength could feed upon itself.

Technicals: Price action is firmer in gold than silver this morning, but both find themselves retesting massive levels of resistance. Ultimately, gold is more important here as it nears rare major four-star resistance at 1829-1833; a close above here is likely to invite strong tailwinds of buying as bulls chase the tape. As for silver, 23.48-23.50 has been the ceiling and a close above there will likely lead to higher prices.