Yesterday, the S&P 500 futures (ESU16:CME) made a high at 2172.25 on Globex, and made a morning session high at 2171.00 before falling down to 2155.75 at 11:25 CT as crude oil sold off down to 43.00. There has a been a lot of buying going on in the S&P and a lot of selling going on in crude oil. Back on July 11 I wrote an Opening Print titled BUY S&P / SELL OIL (https://mrtopstep.com/buy-sp-sell-oil). At the time the ESU16 was trading at 2128 and oil was trading at $45.40. Since then the S&P has rallied as much as 2% and crude has dropped 5.5%.
Beyond all the economic and earning reports this week, the central banks are back in the spotlight. Today starts the two day U.S. Federal Reserve meeting. Traders are waiting to see if there will be any further monetary stimulus out of Europe and Japan to offset any negative impact caused by Brexit. Traders in the U.S. will be waiting on Wednesday afternoon for any clues as to whether the Fed will raise interest rates in the third quarter and beyond after a series of better than expected economic data. Right now the rally in the stock market isn’t so much the fundamentals. The rally is being driven by the continued intervention by the central banks and its zero borrowing cost which is pushing money back into the US stock markets.
One of the things I have tried to do is to explain how the historically low rates have made it a ‘no place to go but stocks’ environment, and clearly the Fed’s inability to hike rates has played a major role in the S&P’s push above 2200.00. Clearly the central banks have been underwriting the overall risks to the markets. How long can this go on? Nine years after the onset of the 2007 credit crisis there seems to no change in mindset of the global banks.
Over the last few weeks I have continued to point out how crude oil futures has done a reversal of how it acted when it was going up. When oil sold off, buying would show up above and below the VWAP, but since the move down oil has been unable to hold the VWAP. The chart below clearly shows when oil rallied / short covers you see selling just below and just above the VWAP. It was a very distinctive pattern when oil was going up, and it’s just as distinctive on the way back down.
Nearly two weeks ago when the ESU16 was first touching the 2160 area and I said the next 40 handles from that price would be lower. There were some on Twitter who agreed and some who disagreed with the call. At this point, it’s not that I have been wrong, we just don’t know yet. I thought that this week would give a better clue of where those next 40 handles may come. Tomorrow’s FOMC should be that catalyst, but I am not sure how long it will take to print 2120 or 2200.
Yesterday’s session looked the more promising from the short side. Another failed Globex high, then sell programs that dropped the index on the open, with no real buy programs. A quiet midday without bulls rushing in to buy the dip set up a closing trade in the afternoon that looked promising to make new lows but it didn’t. The ESU16 plugged slowly higher on a MOC imbalance that was $730 million to the buy side.
Overnight, global equity markets traded mostly mixed as Asia & Europe had a light calendar session. The ESU16 maintained a quiet range making an early low on the Asian open at 2158.25, and then double topped at the 2164.25 area before traveling back to 2158.25 on the European open, and double bottoming there. Globex volume is very light at just under 140K at 6:10 cst, but today’s calendar is busy giving some hope that the index will make a move. For now, it looks like the 2155-60 area is maintaining solid support over the last several sessions, meanwhile the resistance zone is at the 2165-70 area, not leaving much wiggle room.
In Asia, 7 out of 11 markets closed higher (Nikkei -1.43%), and In Europe 6 out of 12 markets are trading higher this morning (DAX +0.05%). Today’s economic calendar includes the FOMC Meeting Begins, Redbook, S&P Case-Shiller HPI, PMI Services Flash, New Home Sales, Consumer Confidence, Richmond Fed Manufacturing Index, State Street Investor Confidence Index, a 4-Week Bill Auction, and a 5-Yr Note Auction.
Our View: I keep thinking the S&P is going to pull back, and yesterday it finally looked like it was going to, but the push back to 2166 is only 6.5 handles off the current high. If the bears are going to gain any traction there has to be a big down day followed up by a few more lower closes. The problem for the bears is simple, it’s called money flows, and in the last two days over $2 billion has been bought on the close alone. It’s hard to fight… Our view is to sell the early rallies and buy weakness with the idea we could be topping out. If the ESU can’t get back under 2150 and hold, then this idea maybe no good, and that would mean all we are seeing is a bunch of back and fill price action that will lead to higher prices.
As always, please use protective buy and sell stops when trading futures and options.
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- In Asia 7 out of 11 markets closed higher: Shanghai Comp +1.14%, Hang Seng +0.62%, Nikkei -1.43%
- In Europe 6 out of 12 markets are trading higher: CAC -0.38%, DAX +0.05%, FTSE +0.29% at 6:30am ET
- Fair Value: S&P -5.95, NASDAQ -7.04, Dow -77.96
- Total Volume: 1.26m ESU and 2.6k SPU traded
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