The Rooster Call: Is Crude Affected Equity Futures?

Hit the Mark Trading’s Brief Review of Overnight Market Action Setting the Tone for the Trading Day

Good Morning Traders!
We certainly saw “turn around” Tuesday on the ES and most other equity indexes we follow. No surprise since the trading crowd does this more often than not as an ingrained behavior.

Overnight the action heated up again and we are poised at this point in time as I write for additional gains. Price objective today is that nice round 2000 on ES. 1987.25 is the first challenge.

The financial press attributes the rise in equity index futures to rising crude. CL contract tests the high of August 31.  This is a very important chart event showing a desire for price touch of $50.00 and higher. Crude is also breaking out of a side-way channel.

Yes, crude stocks are at historic highs. Yes this does not include the amount of crude on tankers sitting in the water. Yes, this does not include the prospect of Iran joining the market selling crude. Yes, this does not include the idea of continued global slow down. Yes, all the robust automobile sales are of more energy efficient vehicles requiring less gasoline.

None of this matters when shorts are forced to cover their positons and renegade crude traders are acting like the USA is about to become a non-entity in crude production due to decreased oil rig count.

It is hard looking at the fundamentals of crude to explain why crude is rising…so don’t.  Just follow the money. We have a crude inventory report today at 10:30AM ET.  This house comes tumbling down if Saudi Arabia announces no change in policy. Alternatively, if Saudi Arabia says, production slow down is planned…crude spikes to $60.00 in a heart beat knee-jerk reaction. Crude remains a day trading instrument until further notice.  Anytime crude inventories are shown to have draw down excites crude traders. The American Petroleum Institute (API) reported a draw-down of 1.2 million barrels of crude last week.

Last night we looked at various stock market sectors. Only a couple of sectors are not participating in the rally. CNBC will likely have an “expert” say biotech are cheap and call for buying bargains.  The theme will be echoed and this is how the biotechs will rise from the fall.  Meanwhile, the strength of participation by other sectors show the current rally is broad based. A broad based rally is a fundamental building block of a sustained rally.

IMPORTANT – Yesterday after hours ADOBE announced earnings would not meet expectations. The stock was trounced 8.8% at one time. Also Yum Brands said recovery in the Chinese market was not happening fast enough and earnings would be affected.  YUM has dropped 14.88% in pre-market today. MON just announced missing profit and sales expectations and the stock is falling pre-market. To blunt the negative news MON announces 2,600 job cuts because Wall Street wants to see management taking action.

Why is this important?  These two firms highlight the kind of market we are seeing…an extreme sensitivity to pre-earnings announcements and earnings miss. I expect an increased series of these type announcements as earnings season starts this month. 

This discussion leads into asking the question…if analysts continue lowering profit expectations, if the global economies are slowing, and if firms start issuing negative pre-earnings announcements, what will sustain the market rally? We are entering the third consecutive earnings season with lowered expectations from Wall Street.

Just keep this question in the back of your mind.  Seasonally we expect a lift off at the end of October.  Have we started the rally early?  Be aware of professionals driving price higher from which point to sell. Know your chart bench marks.

The current rally appears to reflects the belief the US dollar will fall without support of a FED interest rate increase. Traders looking to the future expect the hidden hand of global trade to save the USA economy and by extension corporate earnings. Coupled with rising crude lifting the energy sector, these events have been the only “positives” for a beaten down bull camp.

IMF again cuts global growth seeing 3.1% in 2015 and 3.6% in 2016.  Previous forecasts were 3.3% and 3.8% respectively (Business Insider).

Bank of Japan keeps policy on-hold.

UK Industrial production reported 1% higher month over month versus expectations of a 0.3% gain for August. Pound is higher.

Moody’s maintains USA triple A credit rating status but notes longer term threats to the rating (Reuters).

Economic Events
7:00 MBA Mortgage Applications
8:30 Gallup U.S. Job Creation Index
10:30 EIA Petroleum Inventories
1:00 PM Results of $21B, 10-Year Note Auction
3:00 PM Consumer Credit

Consumer credit is a window into the willingness to take on additional debt load. As a general rule, the expansion of consumer credit is a lubricant for consumption.

 Markets

  • All futures we follow are higher. In case USA traders drop ES back to overnight low, any rejection of this low will likely lead to a day long rally. The structural technical components are in place.
  • VIX trades below 20…our line marking the danger zone.
  • Brent and USA Crude higher. The rise takes up Gasoline, Heating Oil, Natural Gas, and Ethanol.
  • Gold and Silver higher with Silver breaking resistance.
  • Copper surges higher with Platinum.
  • Corn, Soybeans, and Wheat higher as “risk-on” affects most all commodities.
  • Cocoa surges.  I warned about this potential on Monday and Tuesday nights for those who took shorts based on our work watching price at the right edge of the chart.
  • Coffee higher with Sugar and Cotton.
  • Lumber’s price action today if the rise continues suggests classic bottom as all markets are affected by “risk-on” mode.
  • Bonds lower in reaction to ES higher. Yesterday with ES lower, bonds were higher.
  • US dollar is lower. A lower US dollar will help emerging market economies.
  • Euro incrementally lower.
  • Yen incrementally higher on no-change in stimulus.
  • Pound higher on economic report and falling US dollar.
  • Aussie dollar higher as commodities are rising in general “risk-on” environment.
  • Canadian dollar surge continues with crude as we expected could occur.

Think About This!
Risk-on! A rising tide lifting all boats thanks to the mother of all economic reports…US Employment Situation report issued last Friday morning.

Have a great trading day! 

To learn more from Martin, visit HitTheMarkTrading.com to join his mailing list and receive blog updates.