Yesterday, as the equity markets entered into the final trading day of the first quarter, the S&P appeared as though it was potentially poised to begin to work on targeting the 2100 area, and we said that the prior 2050 resistance would need to be converted into support. The ESM16 bounced between the VWAP and daily pivot for much of the day until the mid-day selling entered in the markets. From there the benchmark index dropped more than 10 handles before rallying on a market-on-close imbalance $1.5 billion to the buy side, but failed to hold those gains into the settlement and closed lower on the day.
Overnight markets around the world traded sharply lower as the S&P dipped as low as 2041.25 this morning, down 10.25 handles, ahead of the 7:30 NFP. After the S&P broke the 2040-50 resistance earlier this week, that area needed to be converted into support, and at this point it doesn’t appear to have propped up the market at all on its first test lower. From our point of view, today’s non-farm payroll release seems like this; a surprise to the upside won’t do much to affect the markets. In recent months there have been a few upside beats, however, if the number comes in as a noticeable miss, it will add more fuel to the flames from Yellen’s speech earlier this week, which seemed less optimistic concerning the economy and more dovish for monetary policy.
Last week I said the next 60 handles from the 2040 print were lower. While the ESM16 sputtered lower, and then popped higher, it’s currently back at the 2040 level. At the end of the day, my next 60 handles projection is still on the table, and could be the right call. This rally was made possible by Fed Chair Yellen’s comments, but it seems the Fed has double vision as other members of her board seemed to have a different view this week, including historically dovish members who reiterated their perception that there would be two interest rate hikes this year.
We have talked about event driven lows, but there are also event driven highs. This week, when Yellen spoke, we saw a bulk of buy programs enter the market and push it to higher levels, but did it go too high too soon? Now buyers are stranded above 2050 with nothing to support their buy side momentum, other than Yellen’s words, which did not seem entirely supported by other members. At the same time the Fed Chair, speaking less optimistically concerning economic condition, pushed the market higher, something that is outside of conventional reason.
At the end of the day this push higher may be the gift that shorts were looking for. 2075 and 2100 were the first test areas for buyers after this week’s rally, and the first area for sellers to target was the prior resistance of 2040-50 ,which was taken out overnight. Below this we still have to consider 2000 a reasonable target. We noted last week how markets have tended to go lower post Opex week and for the two weeks after the Fed meeting. They also tend to go lower post NFP. So while we are cautious there could be more downside. Another factor to consider is the fact that today is the first trading day of the new quarter, and the March NFP tends historically to be a miss, this sets up for what could be a pivotal Friday. At the same time, we don’t want to be overly bearish because we know who controlled the take over the last 6+ weeks, and those buyers continually absorbed any stream of selling.
In Asia, 10 out of 11 markets closed lower (Shanghai Comp +0.19%), and In Europe, 12 out of 12 markets are trading lower this morning (DAX -2.12%). Today’s economic calendar includes the Motor Vehicle Sales, Employment Situation, PMI Manufacturing Index, ISM Mfg Index, Consumer Sentiment, Construction Spending, Baker-Hughes Rig Count, and Loretta Mester Speaks.
Our View: It’s just after 7:00am CST and the ESM16 is trading at 2042.00. If we buy, we want it to be on weakness, not an upside pop. So we lean to selling the 2050 area, yesterday’s high of 2060 or the 2065 area high for the week. To the downside, the 2040 area may be the last line of defense for the bulls, as sellers could target the 2030 weekly pivot area. If we were buying weakness that 2030 area should hold at least on first test. Remember, often times the first move is the wrong one, no need to give anything away on a Friday. Pick your spots, be patient with entries, and let profits ride.
As always, please use protective buy and sell stops when trading futures and options.
- In Asia 10 out of 11 markets closed lower: Shanghai Comp +0.19%, Hang Seng -1.34%, Nikkei -3.55%
- In Europe 12 out of 12 markets are trading lower: CAC -2.11%, DAX -2.09%, FTSE -1.25% at 5:30am CT
- Fair Value: S&P -8.36, NASDAQ -9.99, Dow -100.87
- Total Volume: 1.7mil ESM and 7.2k SPM traded
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