RJO FuturesCast

August 2, 2019 | Volume 13, Issue 31

The Markets

Metals - October Gold Whipsaws, New Target is $1500

Volatility is a beautiful thing! When the gold bears looked to gain the edge yesterday with a slumping chart pattern, a strong stock market, and general positive economic sentiment a breakdown below $1400 looked likely. October gold futures have held $1400 for most of July with a few retests of the key level. In my last write up on gold I had mentioned this would be key for anyone bullish the gold, holding $1400. It appears that an escalation of the trade war was the all the spark that was needed to get bulls excited and gold had a major reversal from $27 down to $14 up. A $40 swing in the span of a few minutes! The US economic data and overall positive sentiment in the market has been a headwind for gold bulls and with the new China tariffs on essentially all remaining Chinese imports it is clear (if it wasn’t before!) that this trade war is here to stay. It’s likely to remain for the rest of 2019 as both sides can’t even do baby steps for stepping down this tit for tat trade war.

Yesterday’s move does not mean buy with both hands, it simply builds the bull case for gold over the next few months, as rate cuts seem more apparent and safe haven buying comes into the picture stronger than ever. A key level to watch here is a breakout above the July 19th high of 1460.30. A move above this level would signal to me that a run to $1500 is likely. If you needed any more reason to be confident yesterday’s move was for real, October gold traded over 600,000 contracts yesterday with an average daily volume of 402,000. Confidence is what I saw yesterday!

Gold Oct '19 Daily Chart
Energy - Crude Oil Giving No Direction

Crude oil futures have had a wild ride this week with increased volatility, lack of direction and mixed fundamentals. Looking at the supply demand structure, we are still seeing current EIA oil stocks sitting at 436 m/b and the 5-year average is 427 m/b leaving supply adequate. The FED cut interest rates last Wednesday and with the 10-year yield at 1.99% and the 3-month at 2.06, the yield curve has been inverted for several months now and could indicate that we are headed into a recession in the next 24 months.  The technicals leave the market open to a potential washout into the low 50’s while the average true range is up at $1.68 meaning we see a $1680 range on a 1 lot everyday so use caution.

Crude Oil Sep '19 Daily Chart
Energy - Bottom in Nat Gas?

Never can we conclude a broader base/reversal count from just a bullish divergence in short-term momentum. But the extent and impulsiveness of today's recovery above 25-Jul's 2.248 minor corrective high and our short-term risk parameter arguably breaks the downtrend from 10-Jul's 2.476 high.  This defines Mon's 2.101 low as one of developing importance and our new short-term risk parameter from which non-bearish decisions like short-covers and cautious bullish punts can be objectively based and managed by shorter-term traders with tighter risk profiles.

The prospect that this month's decline from 2.476 to 2.101 is a (textbook) 5-wave Elliott sequence is labeled in the 240-min chart below.  Also relevant to any base/correction/reversal threat is the market's gross inability to sustain Mon's break below 20-Jun's 2.115 obviously key low and support.

To be sure, major reversal structures require commensurately major proof of, in this case, strength.  And 10-Jul's 2.489 next larger-degree corrective high remains intact as THE KEY long-term risk parameter the market needs to recoup to, in fact, break Mar-Jul's major downtrend.  However, ancillary base/reversal-threat factors include:

  • an arguably textbook 5-wave Elliott sequence down from 19-Mar's 3.003 high on a weekly log scale basis below amidst
  • historically bearish levels in our RJO Bullish Sentiment Index of the hot Managed Money positions reportable to the CFTC.

The developing POTENTIAL for a bullish divergence in momentum is clear in the weekly chart below, but a recovery above 2.489 remains required to CONFIRM this signal to the point of non-bearish action by long-term players.

Another factor we've recently discussed as a contributor to a base/reversal environment that could be major in scope is the market's recent dip into the lower-quarter of a lateral range that has dominated price action for the past 10 years.  If there's a time and place on this scale to be leery of a major base/reversal, it is here and now.  Again, today's bullish divergence in admittedly very short-term momentum is far from sufficient to conclude anything more than another interim corrective hiccup ahead of resume price bashing.  BUT IF this market continues to prove trendy, impulsive price action on this recovery AND proves labored, corrective behavior on subsequent relapse attempts, that will be the next phase of reinforcing behavior to a base/reversal count.  Needless to say, a relapse below 2.101 nullifies this prospect, reinstates the bear and exposes potentially sharp losses thereafter.  By the same token, continued impulsive gains above 10-Jul's 2.489 high will confirm a major base/reversal count that we believe will be as major in scope as any of the past three major intra-range rebounds over the past 10 years.

These issues considered, shorter-term traders have been advised to move to a neutral/sideline position while longer-term players have been advised to pare bearish exposure to more conservative levels, liquidating remaining exposure on a recovery above 2.489.

Softs - Sugar Futures Building Strength on Production Concerns

October’19 sugar futures start the day continuing to fight for gains after the July 23rd hammer down and rally, supported by production uncertainties. The top two sugar producing nations (India and Brazil) both are demonstrating issues. India has been struggling notably with weather related issues and Brazil is 3.99% behind last season on cane crushing with overall sugar production behind by 10.80% behind last season and recent gains in the energy markets supporting a drive towards ethanol production. With an anticipated growth in global consumption and a decline in production there is a solid possibility that there will be a sizeable deficit. The charts indicate the trend is becoming bullish having a close over the 18-day moving average, and divergence between the price trend and momentum suggest there could be an impending breakout. Sugar futures could become a strong performer for bulls if prices break resistance in the short term and production uncertainties start becoming realities.

Sugar Oct '19 Daily Chart
Agricultural - Grain Futures Update w/Stephen Davis - 8/1/2019

RJO Futures Senior Market Strategist Stephen Davis discusses the grain futures markets.  If you have any questions or would like to discuss the markets further, please feel free to contact me at 800-367-7181 or sdavis@rjofutures.com.

Agricultural - Live Cattle Trading Sideways, Expect a Turn Down

October live cattle have been mostly trading sideways for the week with exception of the past two trading days. Cash cattle traded a little higher last week which could bring some support to the market for the rest of this week. There was no breakthrough of the $110.00 level, but conversely there was no major sell-off to the $107.00 level like I suspected would happen. Supply should tighten later this year with 1st quarter production seeing a much larger drop then 4th quarter which would help drive Feb cattle prices up. One of the factors putting pressure on this market is the idea that export news is negative along with the high short-term beef supply coupled with weak demand for August. Since there was no violation of the $110.00 resistance then I suspect prices to trend lower and stay between the $107-$110 range. USDA boxed beef cutout values were up $1.20 at mid-session yesterday and closed 77 cents higher at $214.03. This was up from $213.78 the prior week and the highest since July 10th. Cash markets last week were firm with Kansas trade at a weighted average price of $111.98 and Texas at $111.96, up about $1.00 from the previous week. Nebraska traded at $114.78 from $114 the previous week.

The hog market saw aggressive selling the past couple days, as the market lost roughly $8 over the past 4 days due to fears of the U.S./China trade talks falling through. Chinese pork production is expected to decrease by 8% while the imports are expected to rise at least 40% year over year. USDA pork cutout values, released after the close yesterday, came in at $85.37, up $2.67 from Monday and up from $79.46 the previous week. This is the highest pork value since May 21st. The CME Lean Hog Index as of July 26th was 80.36, up 1.50 from the previous session and up from 73.27 the week prior. The USDA estimated hog slaughter came in at 470,000 head yesterday. This brings the total for the week so far to 922,000 head, down from 948,000 last week, but up from 891,000 a year ago.  

Live Cattle Oct '19 Daily Chart
Currency - U.S. Fed: Not Dovish Enough - Currencies Fluctuate to New Extremes

Currency futures were in complete fluctuation this week, as the Federal Reserve cut the benchmark interest rate for the first time since 2008. We observed huge levels of volatility as the markets searched for direction during a historic week for monetary policy. A 25-bps rate cut was largely priced into markets, but the rhetoric of Chairman Powell had investors and traders on edge. Given stagnant inflation, weak manufacturing, and global trade tensions, it was no surprise to see the FOMC loosen the belt of monetary policy to stimulate borrowing and business investment. However, markets were hoping the Fed announcement would hint at a lengthy easing cycle with multiple rate cuts in the back half of 2019. But Powell indicated this was a mid-cycle insurance cut, to ensure the continuation of the expansion in the face of growth constraints. Will they cut again? Maybe. In short, the chairman was not dovish enough. Because dovishness weakens the domestic currency, it is no surprise that the dollar surged on the news. The floor fell through all major foreign currencies following the report, but rebounds were observed since Wednesday.

Following Trump’s announcement on Thursday regarding additional tariffs on Chinese imports, the USD came well off its weekly highs and safe-haven currencies had all the room to run. The Japanese yen is trading back near contract highs, with the Swiss franc following suit. Commodity currencies were the true losers this week. The Aussie and the Canadian dollar plunged. The euro and the pound deepened bear tracks, especially given Mario Draghi’s dovish rhetoric at the ECB meeting last week. Bulls are only eyeing safe-haven currencies, as fears of a global currency war are looming, and the greenback may lose its place as the reserve currency of the world.

Japanese Yen Sep '19 Daily Chart
Interest Rates - T-Note, Eurodollar, Yen Recoveries Reaffirm Broader Bullish Counts

Yesterday's impulsive spike, first above our short-term risk parameter at 127.23 and secondly above 03-Jul's 128.14 high, obviously reinstates the major bull trend and chalks up early-to-mid-Jul's sell-off attempt as a 3-wave and thus corrective event.  On an intermediate-term scale, any bullish count would NOT be able to include a relapse below 19-Jul's 127.275 (suspected minor 1st-Wave) high of the resumed sequence up from 16-Jul's 126.23 low and end to the (suspected 4th-Wave) correction down from 03-Jul's 128.14 high.  These two levels- 127.27 and 126.23- thus serve as our new short- and longer-term risk parameters from which traders can objectively rebase and manage the risk of a still-advised bullish policy.

Former 128-1/4-to-128-1/2-area resistance would be expected to hold as new near-term support heading forward and a favorable risk/reward buying area on what would have to be first approached as a corrective dip back to this area.

This week's resumption of the major bull trend is obvious in the weekly active-continuation chart below.  This chart shows this resumed bull entering a space totally devoid of any technical levels of merit shy of Jul'16's 134.075 all-time high.  This does not mean we're forecasting a move to 134.  But it certainly does mean that until and unless this market fails below the only pertinent technical levels like former resistance-turned-support like 127.27 or a prior corrective low like 126.23, the market's upside potential is indeterminable and potentially severe, including a run at 134.

Remember, this T-note technical condition has been and remains virtually identical to that of the German bund market from early this year before it exploded higher to obliterate its Jun 2016 previous all-time high at 168.86 after a clear 3-wave and thus corrective sell-off from 2016 to 2018.  Looking at the weekly chart of T-notes below, its 2016-18 sell-off looks to be the same sort of textbook 3-wave affair.  Now we're not going to "rely" on Elliott "theory" to conclude a move to 134+.  But until and unless this market provides even minimal evidence needed to threaten such a bullish count- like fail below 126.23- there is no technical reason to believe we know how high "high" is.  The Fed is not running this thing.  Never has.  The overall world market- formerly known back in the '80s as the Bond Vigilantes- is.

In sum, a full and aggressive bullish policy and exposure remain advised for long-term players with a failure below 126.23 required to negate this count and warrant its cover.  Shorter-term traders whipsawed out of bullish exposure following earlier this week's minor mo failure are advised to re-establish bullish exposure on a setback to the 128.16-area OB with a failure below 127.27 required to negate this specific count and warrant its cover.  In lieu of at least such sub-127.27 weakness, further and possibly steep, even relentless gains are once again exposed. 

While the market hasn't broken 25-Jun's 98.50 high yet, the extent and impulsiveness of yesterday's sharp rebound renders the sell-off attempt from that high to Wed's 98.095 low a clear 3-wave affair as labeled in the daily chart below.  Left unaltered by a relapse below 98.095, this 3-wave decline is considered a corrective/consolidative event that warns of a resumption of the major uptrend that preceded to eventual new highs above 98.50.  In this regard we are identifying 98.09 as our new key long-term risk parameter to a still-advised bullish policy for long-term players.

The market's position just beneath the past month's resistance maintains the prospect then for further intra-range chop.  Given the uninterrupted and steep nature of yesterday's rebound, the only reasonable minor corrective low we can identify as a risk parameter is an extraordinarily tight, micro level at 98.365 detailed in the 240-min chart below.  Of course, such a tight risk parameter comes at the expense of whipsaw risk, so bull traders can pick between 98.36 and/or 98.09 to protect their bullish exposure.  That's just the nature of the beast at the moment, so acknowledgement of and adherence to technical and trading SCALE is paramount under these conditions.

From a long-term perspective shown in the weekly close-only chart below, the market has yet to provide the evidence needed to threaten a bullish count.  Minimally, a weekly close below 98.22 or and intra-week failure below 98.09 is now required to confirm weakness/vulnerability on a scale sufficient to threaten the major bull.  Until and unless such weakness is shown, further and possibly accelerated gains should not surprise.

These issues considered, a bullish policy and exposure remain advised for long-term players with a failure below 98.09 required to negate this call and warrant its cover.  Shorter-term traders whipsawed out of exposure following this week's earlier bearish divergence in mo are advised to first approach a setback to the 98.30-area OB as a corrective buying opportunity with a failure below 98.09 required to negate this call and warrant its cover.

The market's recovery above our short-term risk parameter at 92.53 yesterday morning confirmed the bullish divergence in short-term momentum stemmed the recent slide from 18-Jul's 93.67 high.  This mo failure preempted the subsequent explosive rally that, like the T-note and Eurodollar markets, rendered the entire sell-off from 25-Jun's 94.22 high to yesterday's 91.76 low a 3-wave and thus corrective affair that resurrects Apr-Jun's broader uptrend that preceded it.

Today's continuation of this recovery leaves today's 93.25 low in its wake as the latest smaller-degree corrective low and tightest risk parameter this market is now required to fail below to defer the bull and expose another intra-range setback.  Until and unless at least such sub-93.25 weakness is shown, a continued rally to new highs above 94.22 should not surprise.

If there's a difference between the U.S. interest markets and the yen, its that the yen remains trapped deep within in the middle-half bowels of an incessant, multi-year lateral range shown in the weekly log chart below.  With market sentiment/contrary opinion indicators at historically high levels, we are not confident that this intra-range bull will be able to sustain itself.  But as a result of yesterday's events, we 1) anticipate at least one more round of new highs above 94.22 and 2) have an outstanding low, support and risk parameter at 91.76 that we can objectively gauge a major momentum failure that, combined with frothy sentiment , will resurrect a major peak/reversal environment.

In sum, traders have been advised to neutralize recent bearish policy and exposure.  But while we anticipate further gains, the market's current position just beneath 25-Jun's 94.22 high and resistance presents poor risk/reward merits for bullish exposure "up here".  Per such, a neutral/sideline policy is advised for the time being.

Equity - Stocks Lower on Trade War Fears

Stock futures whipsawed this morning as traders analyzed the newest Trump trade policy.  Stocks ended up on the downside after President Trump said he was adding new tariffs on good from China. Trump tweeted,” The U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country,”. The market was also trading lower earlier as the US job report was generally in line with expectations.  The economy added 164,000 jobs in July just a bit lower than 165,000 estimations.  This gain pushed the labor force in the U.S. to a new high.  Wages also beat the estimated number by rising 3.2% on a year by year basis beating the Dow Jones forecast by 0.1% pts.

Resistance is checking in today at 298700 and 303500 while support is showing 291600 and 289500.

E-Mini S&P 500 Sep '19 Daily Chart
If you have any questions or would like to discuss the markets further, please feel free to contact me at 888-861-1656 or jyasak@rjofutures.com.

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