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Dow, S&P 500 Talking Points:

- Equity markets continue to show tendencies of a turn, and bearish signals for the risk trade continue to stack up in the aftermath of last week’s FOMC rate decision.

- Yen-strength has remained a fairly visible theme to go along with the premise of risk aversion, going along with lower US yields, nearby yield curve inversion, strength in Gold prices and a continuation of Yen-strength.

- DailyFX Forecasts are published on a variety of currencies such as Gold, the US Dollar or the Euroand are available from the DailyFX Trading Guides page. If you’re looking to improve your trading approach, check out Traits of Successful Traders. And if you’re looking for an introductory primer to the Forex market, check out our New to FX Guide.

Do you want to see how retail traders are currently trading GBPUSD? Check out our IG Client Sentiment Indicator.

Dow, S&P Show Tendencies of a Turn After FOMC

Last October brought a tidal wave of change to US equity markets. After a smooth and comfortable ride higher over the prior two months, further recovering from a spill in stocks in Q1, equity traders awoke to a very different reality as the page turned into October. The generally sanguine backdrop leading into that period had allowed for continued rate hikes from the Fed as the bank looked to further normalize policy. Earlier, the FOMC had announced an exit from stimulus and then eventually a move in the other direction by allowing for balance sheet runoff. But as markets traded into Q4, the very operative question of ‘how long might this go on’ began to percolate, and in an off-handed remark early in October, FOMC Chair Jerome Powell implied that the bank had plans for a number of future rate hikes.

Dow Jones Industrial Average (DJIA) Eight-Hour Price Chart

djia us30 eight hour price chart

Chart prepared by James Stanley

Market participants did not seem to like this very much. In short order, stocks began to turn and soon bearish price action began to pick up speed. By the time November rolled around, it had started to become clear that something was shifting; just very few knew exactly what. In response to this growing theme of uncertainty, FOMC members started to walk back those hawkish claims, adopting more of a wait-and-see approach rather than a committed stance of continued rate hikes.

At the December FOMC rate decision, the bank held rates flat; but they also retained the forecast for two rate hikes in 2019 and, again, this was something that was not cheered by market participants, and stocks soon started to move back down. By the time Christmas Eve rolled around, the S&P 500 had set a fresh low a full 20% away from the highs that showed earlier in October.

S&P 500 Daily Price Chart

Dow Jones DJIA Price chart

Chart prepared by James Stanley

What’s happened after that was probably expected by very few. Stocks began to turn-higher in a rather aggressive manner after Christmas, and that theme of strength ran into January. As this was happening, the Fed continued to shift into a more dovish position, first telegraphed through media appearances with various FOMC members and then, eventually, at the March rate decision. At that meeting, the bank formerly cut the expectation for two rate hikes this year down to zero.

This led into a pattern of bullish continuation in April as the S&P 500 continued to push-up to fresh all-time-highs. Those fresh highs held as the page turned into May, and last Wednesday’s FOMC rate decision saw the bank hold rates again. This created a quick bearish move in the S&P that, at this point, has continued to build with a continuation of lower-lows and lower-highs.

S&P 500 Four-Hour Price Chart

s&p 500 spx four hour price chart

Chart prepared by James Stanley

What’s the Driving Force?

At this point, deduction would imply that the FOMC wasn’t dovish enough at last week’s rate decision, and this can be evidenced through a couple of different facts. First and foremost, those expectations for at least one rate cut in 2019 have dropped from a pre-FOMC read of around 68% to a current show of 57.9%. But, digging a bit deeper, that prior tonality of continued strength in stocks has been flipped on its head as those higher-highs and higher-lows leading into May price action has turned into lower-lows and lower-highs in the month of May.

Dow Jones Industrial Average Two-Hour Price Chart

Dow Jones Industrial Average Two Hour Price Chart

Chart prepared by James Stanley

Dow, S&P 500 Strategy

At this point, fresh bearish exposure could be a challenge in both the Dow and S&P 500. Both indices are trading around monthly lows and if this does turn out to be a mere pullback, traders may be facing the prospect of selling a fresh low.

So, for establishing fresh bearish exposure, traders would likely want to wait for a signal of some kind. Current support in the S&P 500 is showing around the 38.2% retracement of the March-April bullish run, and this lines up with the early-April swing lows. This can open the door for bearish breakout potential or, on the other side of the matter, a pullback to resistance at prior support. This could be sought-out around the 2893-2903 area on the chart.

S&P 500 Two-Hour Price Chart

s&p 500 spx500 hour price chart

Chart prepared by James Stanley

For bullish strategies in US stocks, or for those looking to fade this recent move of risk aversion – the Dow Jones Industrial Average may be a touch more attractive. I looked into this backdrop in yesterday’s webinar, and prices are currently testing a big area of support on the chart around the 25,900 area. For this theme, traders can watch to ensure that this morning’s low remains above yesterday’s low, re-opening the door for a return of higher-highs and higher-lows after the FOMC-induced week-long pullback.

Dow Jones Four-Hour Price Chart

dow jones four hour price chart

Chart prepared by James Stanley

Other Signs of Potential Distress

This above observation of enhanced risk aversion is not relegated solely to stocks. As looked at in this week’s technical forecast for Gold prices, buyers appear to have returned after last week’s failed bearish breakout; keeping the door open for continued topside price action. In bond markets, US Treasury Yields have continued to fall and the yield curve inversion that’s already showed twice this year (Three-Month T-Bills v/s 10 Year Treasury Notes), albeit on a temporary basis, appears close to showing again. In the 10-year specifically, yields are again back-below 2.5%, falling back into a descending channel that’s been in play for much of the past 25 years.

TNX (10-Year Treasury Yield) Monthly Chart

TNX Monthly Price Chart

Chart prepared by James Stanley

In the FX world, this risk aversion has been showing via Yen-strength. This was a focal point in yesterday’s webinar, looking at that scenario against a number of major currencies. And depending on how one would like to move forward, either by looking for risk aversion to continue or looking to fade the move, there’s a setup on both sides.

For fading the move, EUR/JPY has continued to hold support around a Fibonacci level at 123.10. This can, at the least, provide a cogent backdrop for risk management that can keep the door open for reversal plays.

EUR/JPY Hourly Price Chart

eurjpy eur/jpy hourly price chart

Chart prepared by James Stanley

On the other hand, for a continuation of risk aversion, AUD/JPY may be of attraction, as the pair has broken below 2019 support with a gap-lower to start this week. That gap quickly filled around the RBA rate decision, and bears returned for another push. If the themes of risk aversion do continue to increase, this can allow for continue pressure in AUD/JPY price action; and the zone around the 75.00-handle on the chart could be an attractive spot to look for that next element of support.

AUD/JPY Daily Price Chart

audjpy aud/jpy daily price chart

Chart prepared by James Stanley

To read more:

Are you looking for longer-term analysis on the U.S. Dollar? Our DailyFX Forecasts have a section for each major currency, and we also offer a plethora of resources on Gold or USD-pairs such as EUR/USD, GBP/USD, USD/JPY, AUD/USD. Traders can also stay up with near-term positioning via our IG Client Sentiment Indicator.

Forex Trading Resources

DailyFX offers an abundance of tools, indicators and resources to help traders. For those looking for trading ideas, our IG Client Sentiment shows the positioning of retail traders with actual live trades and positions. Our trading guides bring our DailyFX Quarterly Forecasts and our Top Trading Opportunities; and our real-time news feed has intra-day interactions from the DailyFX team. And if you’re looking for real-time analysis, our DailyFX Webinars offer numerous sessions each week in which you can see how and why we’re looking at what we’re looking at.

If you’re looking for educational information, our New to FX guide is there to help new(er) traders while our Traits of Successful Traders research is built to help sharpen the skill set by focusing on risk and trade management.

--- Written by James Stanley, Strategist for DailyFX.com

Contact and follow James on Twitter: @JStanleyFX