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Trading the Selloff Ahead of the Election

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E-mini S&P (December)

Yesterdays close:Settled at 3383, down 10.50

NQ, yesterdays close:Settled at 11,588, up 98.75

Fundamentals:Risk-assets are down sharply at the onset of U.S. hours. Heavy selling began at the European open and on news that German Chancellor Merkel will look to close bars and restaurants for the month of November. The German Dax is down 3.3% and at the lowest level since June 15th. Benchmarks across Europe are broadly following suit. Domestically, the State of Illinois has taken similar steps to roll back reopenings and has increased restrictions beginning Friday, including a ban on indoor dining. With the election less than a week away, the Midwest battleground states are seeing a surge in Covid-19 cases. The U.S. Dollar is strengthening as a safe-haven asset and Gold as well as other commodities are taking a beating on deflationary fears. Although we never expected Washington to agree on a bipartisan Coronavirus Aid bill ahead of the election, the added stimulus would have certainly helped stave off the selling.

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We are in the thick of earnings season. Microsoft reported after the bell yesterday and the behemoth is down about 2% premarket. Although they topped third quarter estimates, led by strong demand for its cloud services, a softer than expected outlook for the fourth quarter has weighed on the stock. Among a deluge of companies to report this morning are Boeing, Visa, Norfolk Southern and UPS.

Todays calendar pales in comparison to tomorrow. Ahead of the bell we have the first look at Q3 GDP accompanied by earnings. After the bell, each Apple, Amazon, Alphabet and Facebook report third quarter results.

Technicals:The S&P has taken out Mondays low of 3356 by 1%, whereas the NQ is still holding about 0.5% above its equivalent. To say yesterdays session finished on soft footing is an understatement.Major three-star resistance at 3406.75-3410 contained rally attempts and that in and of itself laid the groundwork for continued selling, with a path of least resistance to major three-star support at 3329-3330.50. Bill Baruch joined CNBCs Futures Outlook yesterday to discuss just that.Where to now? We Neutralized out Bias after the break Monday and have exuded extreme caution ahead of the election for weeks. Nothing has changed on that front. Last week, we noted that patience ahead of the election could lead to great opportunity after, therefore we are welcoming selling. Our next major three-star support in the S&P comes in at 3287.50-3291.25; this could bring enough flush through the opening bell to pave the way for an intraday bounce that could see a test as high as 3353.25-3356. There is also unfinished business at yesterdays close, a gap at 3383. Similarly, the NQ has major three-star support at 11,266-11,273 and a flush into here after the bell could lead to a rally that tests as high as 11,539-11,588; this aligns previous support with yesterdays settlement. Traders want to be very cautious if continued selling does not see a bounce; this could get ugly, eluding to a lack of liquidity ahead of the election.

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Resistance: 3353.25-3356***, 3383***, 3406.75-3410***, 3431.75-3437.50***

Pivot: 3329-3330.50***

Support: 3300.25**, 3287.50-3291.25***, 3279**, 3231-3238***, 3172.75-3198****

NQ (December)

Resistance: 11,539-11,588***, 11,695**, 11,750-11,789***, 11,860-11,876**, 11,950-11,974***

Pivot: 11,414

Support: 11,343**, 11,266-11,273***, 11,136.50-11,167***, 10,829-10,891.75***, 10,656-10,660***, 10,489-10,558****

Crude Oil (December)

Yesterdays close:Settled at 39.57, up 1.01

Fundamentals:Crude Oil is down sharply and tracking the overall risk-environment. Increased restrictions in both the U.S. and Europe due to the resurgence of Covid-19 has reinvigorated deflationary fears and takes a toll on energy demand forecasts. Traders must keep a pulse on the broader environment, and over the intermediate-term we are upbeat on risk-assets. However, this thesis does rely on continue stimulus support. For energy specifically, it relies on OPEC+ postponing their scheduled production cut taper.

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A larger than expected build of Crude on last nights private API survey helped get the bearish ball rolling late yesterday. They posted +4.577 mb of Crude, +2.252 mb Gasoline and -5.33 mb Distillates. Todays estimates for the official EIA report due at 9:30 am CT are -2.538 mb Crude Oil, -0.961 mb Gasoline and -2.065 mb Distillates.

Technicals:We Neutralized our Bias yesterday and continue to hold such. Despite a buoyant second half of yesterdays session, Crude has traded directionally south since the API release. The tape extended to a swing high of 39.83 and out above major three-star resistance at 39.33-39.36. The failure today signals that such is extremely fundamental. Nonetheless, the technicals do matter and price action is coming into a critical level of rare major four-star support at 36.93-37.06. It is important to understand that this would be the third test and a break below opens the door to 34.82. Our momentum indicator has yet to dive and comes in at 38.73. Our Pivot is previous support at 38.06-38.28 and we must see the tape regain this level in order to begin neutralizing the damage.

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Resistance: 38.73**, 39.33-39.36***, 40.46**, 40.98**, 41.50-41.74***

Pivot: 38.06-38.28

Support: 36.93-37.06****, 34.82***

Gold (December)

Yesterdays close:Settled at 1911.9, up 6.2

Fundamentals:Gold is down sharply and tracking risk-assets broadly as the U.S. Dollar strengthens on safe-have demand. The deflationary fears are real with the U.S. and Europe enacting lockdowns. Furthermore, there was certainly wind taken out of Golds sails when Washington failed to pass stimulus measures ahead of the election. Although we never expected it, the market was hoping. Golds failure today opens the door for continued weakness during this seasonally soft time of year and only a dynamic fundamental shift through today will encourage a rebound.

Technicals:The tape is chewing through major three-star support at 1877.1-1880. As we have noted, this opens the door to a retest into 1851 and rare major four-star support at 1845.4. Although we expect continued pressure in the near-term, we remain longer-term optimistic and this has not negated our first quarter expectations. Our momentum indicator has yet to dive, but we envision it aligning with previous lows on the week at 1892.5 before the end of the session and this brings a point of balance in which Gold must regain in order to neutralize these waves of selling.

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Resistance: 1892.5**, 1902-1905***, 1915-1917**, 1933-1937***, 1950-1958***

Support: 1877.1-1880***, 1866.3*, 1851**, 1845.4****, 1829.8***

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Futures trading involves substantial risk of loss and may not be suitable for all investors. Trading advice is based on information taken from trade and statistical services and other sources Blue Line Futures, LLC believes are reliable. We do not guarantee that such information is accurate or complete and it should not be relied upon as such. Trading advice reflects our good faith judgment at a specific time and is subject to change without notice. There is no guarantee that the advice we give will result in profitable trades. All trading decisions will be made by the account holder. Past performance is not necessarily indicative of future results

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About the author

Bill Baruch is President and founder of Blue Line Futures a leading futures and commodities brokerage firm located at the Chicago Board of Trade. Blue Line’s mission is to put the customer first and bring YOU the best customer service, consistent and reliable research and state of the art technology. Bill has more than a decade of trading experience. Working with clients he focuses on developing trading strategies that present a clear objective for both long and short-term trading approaches. He believes that in order to properly execute a trading strategy, there must be a well-balanced approach to risk and reward.

Prior to Blue Line, Bill was the Chief Market Strategist at iiTRADER which followed running a trade desk at Lind Waldock and MF Global.

Bill is a featured expert on CNBC, Bloomberg and the Wall Street Journal as well as other top tier publications.

Contributing author since 10/6/17 

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