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S&P Fails Bullish and Bearish Breaks, USD and Yen Reversing?

S&P Fails Bullish and Bearish Breaks, USD and Yen Reversing?

John Kicklighter, Chief Strategist

Talking Points:

  • The S&P 500 failed to metabolize a bullish break of a wedge Tuesday on North Korea, then failed a bearish break Wednesday
  • Concern remains about the state of the global order between overleveraged markets and increasingly belligerent relationships
  • We weigh conviction behind reversals for the Dollar, Yen and Franc crosses along with breakout pressure on SPX and Oil

Are retail traders positioning for true reversals from EUR/USD, the S&P 500 and EUR/CHF? Which direction do traders see the tightening Crude Oil range breaking? See the IG positioning data on the DailyFX Sentiment page.

Sentiment and market positioning seem to be in a 'pick your poison' paradox. The backdrop for speculative appetite reads both as stretched and faulty, a situation that could render any serious concern capable of wiping out substantial premium in stretched assets. And yet, despite the growing skepticism, the markets have championed through painful headlines and tangible hits to return without capsizing. There is good reason to prepare for an eventual collapse in this house of cards - the limited potential versus exponential risk of holding status quo alone should be a first line consideration for trades and investment - but mounting a full speculative charge against the prevailing speculative trend is a recipe for loss. While patience is the crucial virtue for picking a meaningful and lasting trend, there are still opportunities arising in the short-term volatility that continue to develop at the margin and around event risk.

Nowhere is this volatility-versus-trend commitment clearer than with the S&P 500. The benchmark US equity index entered the week with a dwindling wedge that reflected the quietest trading (measured by ATR as a percentage of spot) on record. This virtually guaranteed a break - if at the very least a break of necessity - which looked like a dangerous staging with breaking news that the US President had warned North Korea's leader that the country was prepared to bring 'fire and fury' in response to aggression. A global incident that could escalate into war certainly carries the hallmark of worry that can escalate to risk aversion. Indeed, the index's tentative break above its wedge top and record high at 2,480 broke up on liftoff. The risk aversion that this generated in turn saw the same index gap below the bottom of that same wedge at Wednesday's open and offer technical traders and antsy speculators a signal that could be interpreted as a clear reversal. And yet, that move has yet to materialize. Support at 2,460 that has formed over the past two weeks still stands and there is little to show for the early leap into a risk aversion trade. Sure, the VIX is above 11, the Nikkei 225 has broken its own congestion, the HYG high yield fixed income ETF has tumbled and Yen crosses has forged healthy corrections; but his breadth is still not reinforced with depth such that we can reasonable expect trends.

While a shift in broader sentiment may still be under way, pursuit of that them should be treated with the same reflection and care that pushing the extended bull trends warrants. And given that equities (particular US) are among the most stubborn to show doubt in sentiment, it is better to look at other areas of the market that that can offer additional fundamental and/or technical considerations. In terms of intensity, the Swiss Franc rebound was the most remarkable development of the past 24 hours. Though a safe haven, it doesn't carry the traditional appeal it once had; but the remarkable surge for pairs like EUR/CHF can render a correction a course of least resistance. Far more speculative in tone are the Dollar and Yen reversals. The former has been pummeled to the point of fundamental stretch. A rebound can be a similar, natural course correction. However, for turns on EUR/USD, AUD/USD and USD/CAD; technical milestones should be employed and fundamental markers sought. Alternatively, the Yen crosses seem further along. Extending a bear trend would be ideal through AUD/JPY, NZD/JPY and CAD/JPY. Seeing intensity just start to build would be best served with EUR/JPY. And, always keeping options for different scenarios, GBP/JPY could provide a strong technical backdrop if the Yen crosses were to rebound. We discuss these market dynamics, trend versus volatility commitments and highlight markets in today's Trading Video.

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.