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Equity Drop Doesn't Fast Track Collapse, Dollar Holding Critical Support

Equity Drop Doesn't Fast Track Collapse, Dollar Holding Critical Support

John Kicklighter, Chief Strategist

Talking Points:

  • As dramatic as the S&P 500's tumble was Tuesday, the technical and statistical retreat has yet to spur a meltdown
  • Whether risk accelerates or levels out, there are appealing scenarios among AUD/USD, USD/MXN, USD/JPY and more
  • Between a sentiment connection and Yellen on deck Thursday, the Dollar and EUR/USD are poised at key levels

See what live coverage is scheduled to cover key event risk for the FX and capital markets on the DailyFX Webinar Calendar.

Fear was in the air following the S&P 500's blaring technical break Tuesday which readily spilled over to other 'risk' sensitive assets. However, the jolt that abrupt and wide reach decline delivered didn't set the markets ablaze...at least not yet. Following the post-election trendline break, the equity index notably steadied through Wednesday trade. Had this drop been attached to a particular catalyst (really any item that investors could affix their panic to), it may have more readily turned into an extensive bear trend. Instead, the shift in speculative exposure sans high-profile spark leaves the hesitation that has been hallmark of the environment of complacency these past months and years. The same uncertainty shows in the likes of global shares, emerging markets, carry and other related market areas.

The next move that sentiment takes will likely account for much of the trade opportunity presented - whether that be a strong recovery, absolute collapse or return to holding pattern. It would be prudent for traders to find options that would have higher potential in each of these different scenarios. In the event of full scale breakdown, the options are many as the build up is extreme. Aside from the long fall for US equities, the tentative break for USD/JPY and AUD/JPY or a rebound for USD/MXN at resistance may play out better. Should conviction simply bounce between optimism and pessimism, a lower resistance path like the AUD/USD range may be better speed. And, if risk appetite is to grudgingly mount another leg higher, choosing markets and pairs that have trailed the outperformers offers more room for a struggling view.

As we await conviction in speculative appetite, the Dollar is another asset in waiting. There is a clear connection to risk trends due to the fixation on rate expectations and the use of this currency as a momentum play for early policy skew. Yet, perhaps Fed Chair Janet Yellen (or one of her colleagues due to speak the same day) will help decide the next move from the Greenback. The stakes are high with the ICE Dollar Index sitting at an important 'neckline' of a multi-month head-and-shoulders pattern with the EUR/USD providing a mirror to that technical setup. Path of least resistance - appealing should a strong fundamental view fail to develop one way or the other - would be a move back into the recent range. Pairs like AUD/USD, USD/JPY, GBP/USD should be considered for their needs to produce technical progress (breaks) and momentum. We discuss this and more in today's Trading Video.

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