#12-06 | Margin Call Negotiations, $SPX retraced over 50% of the Pre Powell Pop move, Russia Oil Price FLOOR, US06MY paying 4.71%
More data that the market does not want to front run Fed Chair Powell
Economic Data: Non-Manufacturing PMI
As a result of a survey of purchasing managers in the services sector, including retail, healthcare, and financial services, the ISM Non-Manufacturing PMI for November was 56.5 vs. 53.3 expected. When the PMI is high, the services sector is growing and performing well, which usually means a positive sign for the economy and a negative sign for the stock market. As inflation stands at 7.7%, this is not what the Federal Reverse wants to see in order to keep inflation cool.
When the ISM Non-Manufacturing PMI was released at 10AM Eastern Time, it sent shockwaves through the S&P500. The high PMI led to a drop in investor confidence, which ultimately led to a decline in stock prices and a stronger dollar. Due to concerns that Fed Chair Powell may become more hawkish, a .75 bps rate hike vs .50 bps . Since the majority of inflation comes from the service sector, 56.5 is way too high.
China Zero-COVID
COVID-19 restrictions were eased in some cities by China on Monday morning, resulting in a surge of over 3% in Hong Kong stocks. On Sunday, China started to ease the restrictions of China's Zero-COVID policy.
We identified PDD as the China stock to play China’s re-opening trade. We expect PDD to hold 80.66-84.18 and rotate into 93.01-95.56. The entire China sector is to subject headline risks coming out of China and Energy markets.
Energy & Oil: $USOIL USO 0.00%↑
It is interesting to note that the EU Sanctions and Russia Price Caps take effect today on the same day that China started to lift COVID-19 restrictions. OPEC+decided on Sunday to keep oil production targets at current levels.
OPEC+ will continue to cut daily production of oil by 2 million barrels per day, which amounts to about 2% of world demand, until the end of 2023.
Russian crude oil will be priced at $60 per barrel after the G7 agreed to that cap. Russia has said that it will not accept that cap and will analyze the agreement further.
JPMorgan Chase has said that OPEC+ may revise production in the new year based on new data on Chinese demand trends and consumer compliance with Russian crude production price caps.
As of March 3rd 2022, I had set a target price of 123.62 for USOIL. This year, we were bullish on the energy sector and the oil industry. Last October, we saw the previous highs holding as support and wholesalers starting to buy at the level of 62.46. USOIL HIGH is at 129.42.
A rise in oil prices can threaten the stock market and the broader economy. Higher costs can impact the profitability of businesses, resulting in potentially lower stock values. Consumer purchasing power can be reduced and economic growth can be muted by higher oil prices.
We are looking for 76.77 area to hold as support on USOIL and work back up to break the 9EMA at 82.56. Once we get a D1 close over the 9EMA. We expect the price to retest 90.24, 95.79 and 98.88.
According to Reuters on Sunday, in the event of retaliation against the Russian Price Cap of $60, Russian Deputy Prime Minister Alexander Novak stated that regardless of whether Russia has to reduce production, it will not sell oil subject to a Western price cap.
Taking effect today, EU sanctions will cut off all Russian oil imports into Europe, just as the colder part of winter approaches. It has been only a few months since we were discussing the European energy crisis when the supply of energy to European countries continues to be disrupted and shortages persist.
It has been speculated that Europe will need to find oil to offset the sanctions they imposed on themselves. This has led to potential scenarios regarding how Russia may offload its oil inventory.
Suppose that Russia's oil price caps set a floor price of 60. If Europe's oil reserves run low, where will they purchase oil? If Russia sells oil to India, Turkey for 50-60/barrel and these countries sell it back to Europe for 90-95/barrel, the oil refineries throughout Europe do not know where they will receive the offset in oil.
U.S. Treasuries
As we discussed in our #11-06 plan, cash now pays. We looked at 6 Month T-Bills last time at 4.43%. Now we are at 4.71%. Due to further uncertainty in global markets, investors are selling technology and growth at resistance levels. Until equities go through their earnings repricing, investors remain cautious.
In order to continue to build positions in short term bonds by defending the 9EMA to the downside, we expect the US06MY (U.S. 6 Month Government Bond Yield) to consolidate above 4.632% with the target of 4.973%.
S&P500 E-Mini Futures: PPP (Pre Powell Pop)
The #12-05 post discussed net shorts and bears needing to break the previous day's low at 4027.50, and upon breaking this low we reached our target of 3998.50. In the third short position (yellow zone in chart below), the shorts took control and started building out inventory.
I would like to explain why inventory is too short. We sold off all day after taking out the previous day's low. The majority of inventory is now below this previous short position at 3998.50. We are looking for a move higher to retest the T+2 Low @ 4027.50. We can expect large size traders to make margin call moves during RTH if we fail to repair over the T+2 low. In this situation, things could get messy and all of a sudden there is no bid and we flush even lower.
We took back over 50% of the Pre Powell Pop (PPP). This is also more signs that we are trading thin volume markets where most of the volume is controlled by fast momentum trading. Just 3 trading days ago, people were saying 4500 on the S&P500. The initial over reaction during Fed Chair Powell speech on a signal of .50 bps at the December 14th meeting. The Federal Reserve does not want to see the markets front run their actions. Powell made this clear during his Jackson Hole speech.
Levels:
LIS is @ 3997.25
We are looking for inventory to correct to the upside and a retest of the T+2 Low @ 4027.50 - depending on the reaction at this level. We could see the large size traders who got caught off side FOMO’ing into the Powell Pop (PP) trade their way out of the margin call and repair back over the T+2 Low @ 4027.50 which will open the door to 4045.50, 4055.50. Now if we fail to repair over 4015.50, we could start to see shorts get aggressive and take out the previous day’s low which is at 3987.25 then the lower targets of 3977.25, 3972.50
Institutional Positioning
Last night we discussed BA, META, PDD, LMT…
In light of the higher PMI number, BA did wondering holding up the DOW. Once we broke through 183.78, the door was open to test 186.61. HOD was @ 188.45. We need to spend more time building out inventory at the 186.61 level. Pullbacks into the 9EMA looks good for a move to test 190.40, 206.15.
I think next year there will be a divergence between META and Big Tech’s price action. Last night we talked about META may be subject to a short squeeze once the gap at 128.53 is filled. Although today we made a new intraday high at 124.67. We did stalled and failed to take out the main resistance at 125.78. Over 125.78 will close the gap at 128.53 and potential force shorts to cover.
