S&P 500 Covers its Gap, Dollar Reversal Leaves a Tail, Speculators Seduced
- The market's sharp drop in response to the North Korea missile launch evaporated as the wore on Tuesday
- Reversals in the S&P 500 and VIX showed deflated risk concerns, while the Dollar recovered from a dip to 2.5 year lows
- Questions of conviction are more important than simple direction going forward - can we develop a strong trend here and now?
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As traders, it is hard not to be enticed by the intraday reversals across the market this past session. For some like the S&P 500 and VIX, the late-session turn didn't take place at particularly provocative levels. For the equity index, there was a sizable bearish gap on the open, but there wasn't a fresh trendline break or new low teased. Given the low starting point from the volatility index, it certainly had an uphill battle with convincing that a full risk storm was underway. However, there were other markets where the turn happened to coincide with important technical measures - either multi-year highs/lows or the proximity of major chart-based boundaries. For the likes of the Dollar, EUR/USD and Gold; the drive for traders to execute a trade was far stronger. That said, caution and skepticism should be maintained. The conditions for such high profile quick developments developing into deep current opportunities is not particularly robust.
The jolt of volatility that set the stage for the reversal this past session was the news of North Korea's missile launch. Not exactly a rare occasion, but the trajectory over a peninsula of Japan's northern island and the recent escalation of rhetoric with the West raised the risk level. The swell in concern lasted through the Asia session, but fear started to retreat in European markets and fully reversed through the US session. A proposed oil embargo from the US and Japan can certainly push the situation further, but the market was looking for the former to drive the situation further towards the brink. Yet, US President Donald Trump would not push the language to greater heights than the 'fire and fury' remarks from three weeks ago that triggered a sharp capital market correction. Given the passing influence of this event, can we expect an extension of previous trends much less the depth for full reversals?
Market conditions are still a dominant concern for traders. While there are some impressive trends - such as the Dollar's 2017 dive - they are few and far between. Liquidity has been restrained by the speculative reach over the months and low volatility has in turn restricted the development of new trends or even given substantial momentum to otherwise encouraging breakouts. This should lead traders to shorter duration trades with more reasonable stops and targets rather than pushing for the exceptional trends. While we keep tabs on technical developments and risk trends, there are other fundamental themes to watch. The Brexit negotiations seem to be finding little progress, which further clouds the uncertain outlook for the Pound. Among the crosses, I prefer GBP/NZD to GBP/USD or EUR/GBP. Eurozone sentiment surveys, Australian construction statistics, the Canadian broad trade reading and US ADP payrolls are all worth keeping tabs on but unlikely to prove the genesis of large moves. We look at the trading conditions and opportunities in the market 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.