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Short S&P 500 and Long AUDUSD: Top Trade Opportunities

Short S&P 500 and Long AUDUSD: Top Trade Opportunities

John Kicklighter,
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Heading into the second quarter of 2022, there are a number of high level themes competing for investors’ attention. The resiliency of general risk trends, a distinctly hawkish push from the world’s major central banks, rampant inflation and Russia’s assault on Ukraine all carry a serious weight over the bearings of the global markets. There is potential in this mix to produce relief rallies – such as an end to the war on the Eastern European front – but how many scenarios present an earnest bullish market that would offer a sustainable climb in the S&P 500 to traverse a sustainable drive to progressive record highs? I freely admit that the markets can deviate from what I deem ‘rational’ for an extended period, but I believe a break from this index below 4,100 would be a solid technical cue. However, follow through to confirm the Q1 general bearish course requires fundamentals.

Chart of S&P 500 with 20-Week SMA (Weekly)

Chart prepared by John Kicklighter, created with IG Platform

On the fundamental side, a break in the fog of war is a strong charge for a relief rally; but there seem few other matters that can flip the switch to outright enthusiasm given the mix of headwinds we are dealing with now. Growth forecasts that were naturally leveling out after the post-pandemic, stimulus-fed recovery have been further complicated by inflation and expectations of significantly tighter policy ahead. Though in polite trading circles, most are willing to admit that the Fed and other central banks are moving away from the ‘unlimited QE’ or the ‘central bank put’; in general market positioning, the withdrawal of that safety net does not seem to be discounted at all. That recognition will set in not only as rates rise over the coming months, but also when the central banks start ‘quantitative tightening’ in earnest. And, should the markets swoon with the Fed and Co. holding up their commitment to fight inflation, complacency will transition to fear.

Chart of S&P 500 Overlaid with Major Central Bank’s Total Stimulus (Monthly)

Chart prepared by John Kicklighter

I like to look for market options with diametric outcomes on key events or themes. In the event that speculative appetite actually rises over the coming quarter, the list of explicitly risk-sensitive measures that actually look appealing in technical and fundamental terms is relatively short. One pair that I am looking at through the close of the first quarter is one that technically has a fairly tight forecast for its underlying yield differential. AUDUSD historically has favored the Australian Dollar when the appetite for risk exposure has been on the rise. If general speculative drive holds or rises, preference for traditional carry trades will likely start to gain more traction from the ‘usual suspects’ like the Yen crosses which soared through the month of March. The forward yield differential may be small on AUDUSD, but it has wide historical potential.

Chart of AUDUSD with 20 and 50-Week SMAs (Weekly)

Chart prepared by John Kicklighter, created with IG Platform

On a technical basis, AUDUSD at the start of the near quarter has room to run up to the top end of its recent range. There is serious technical overhead around 0.8000 which defines trendline resistance that stretches back to January 2015 (with three major points of test) and also happens to coincide with the midpoint of the 2011 to 2011 historical range. As the ’50 percent Fib’ of the larger range, there is an inherently significant scope for bullish movement above that milestone. If we broke above 0.8000, I would consider that clearance on an inverse head-and-shoulders pattern and further milestone for bullish progress. That said, I will be fastidious about my confirmation of such a big-picture shift.

Chart of AUDUSD (Monthly)

Chart prepared by John Kicklighter with TradingView Charts

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