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S&P 500 Break, USDMXN Trend or EURUSD Range To Start Next Week?

S&P 500 Break, USDMXN Trend or EURUSD Range To Start Next Week?

2020-05-25 03:00:00
John Kicklighter, Chief Strategist
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S&P 500, USDCNH, USDMXN, NZDUSD Talking Points:

  • Following the strong open this past week, there wasn’t much in the way of traction for risk trends
  • Top fundamental charge is unclear heading into next week, but my top concerns are US-Chinese relations (lean negative) or coronavirus (lean positive) headlines
  • Should the markets favor breakouts, trends or congestion; I have markets to watch, including S&P 500, USDMXN and EURUSD respectively

Risk Trends Leave Us Holding Our Breath for Next Week

There was an enormous amount of pressure to build up into the end of this past week with a smattering of tentative technical breaks and just as many prominent sentient benchmarks leveling up to their key barriers. Traders were waiting with bated breath to see how the collective sentiment would play out. And yet, that critical make-or-break wouldn’t be decided before liquidity drained for the weekend. This is now a decision – with heavy consequences for global markets – to be deferred to next week. What’s more, a run of high profile and unscheduled fundamental themes will keep what could be the ultimate driver murky while a Monday holiday for the UK and US markets will throw another liquidity curve ball. Patience will once again prove an important trader virtue.

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Chart of S&P 500 with 100 and 200-Day Moving Averages (Daily)

Chart of S&P 500

Chart Created on Tradingview Platform

Among the headline speculative readings I like to follow, the S&P 500 remains my preferred, imperfect representation of global capital markets and their irrational lines. Aside from its gap open Monday, the index found little-to-no progress through active trade. That kept it conspicuously between a range of resistance (100 and 200-day moving averages, psychological level) at 3,000 while immediate support was a former ceiling at 2,940. I add my poll from earlier in the week to remind us of how antsy market participants are. It is likely we clear that 60-point range in the first 48 hours of trade in the new week, but a true debate of transition to trend won’t likely arise until we clear either 3,000 or 2,800.

Twitter Poll on S&P 500 Ability to Overtake 3,000

Twitter Poll on S&P 500

Poll from Twitter.com, @JohnKicklighter

What Holds the Greatest Potential/Risk to Start Next Week?

With considerations of an unsteady balance in risk trends, a liquidity gap to open next week and conspicuous lack of singular-influence events on the economic docket, the next inevitable drive for the capital markets is difficult gauge. I put to twitter a list of familiar themes these past week to see which driver this speculative enclave thought was most likely to disturb the uneasy peace. Updates on recession and stimulus matters are low on my list of levered market movement as the market has shown a penchant to downplay troubling updates on severe recession while the most recent stimulus efforts have been met with similar apathy. Coronavirus and trade war matters on the other hand are so untracked as to open door to serious impact.

Twitter Poll on Key Theme Potential Next Week

Twitter Poll on Key Fundamental Themes

Poll from Twitter.com, @JohnKicklighter

Though the state of world health and economic health under the pandemic would suggest that coronavirus headlines would be rife for fear and outright panic, recent trends suggest the opposite. A constant stream of updates on cases and deaths associated to Covid-19 has anesthetized us to the pain of reality. That in turn, amplifies the ‘positive’ headlines where they arise. We have seen this phenomena these past few weeks in the progression of headlines trumpeting a possible vaccine for the virus from Gilead then Moderna and most recently AstraZeneca. Many officials have suggested a vaccine is necessary for a true and lasting economic recovery, and the markets seem to be of a similar mind.

Chart of AstraZeneca with Moderna in Red and Gilead in Blue (Daily)

Chart of AstraZeneca, Moderna, Gilead

Chart Created on Tradingview Platform

Where coronavirus headlines surprisingly find a skew in potential for bullish updates, the headlines around US-Chinese relations seem to lean in the opposite direction. Simply finding the largest economies in the world are avoiding another slide into trade wars is not exactly the foundation of a roaring speculative run. Alternatively, sliding back into protectionist habits with detrimental global growth implications could readily leverage fears like those in August 2015 or 4Q 2018 that would hit a volatile backdrop at present. I will watch this risk in particular through the weekend and into the opening swell of liquidity next week.

Chart of S&P 500 with CNHUSD Exchange Rate Overlaid (Weekly)

Chart of USDCNH and S&P 500

Chart Created on Tradingview Platform

Have Trend and Range Options Ready to Go

For most of us navigating the market, we defer to what we consider our particular expertise. That often results in a strategy that aligns to one of the three dominant market types (range, breakout or trend) – though many believe their approach is more responsive to a single market type than it may be. Given the circumstances, I think there is a high probability of breakout risk and the S&P 500 will be at the top of my list in that category. Yet, break is a transitory phase between range and trend, so it is worth considering these other market forms with options and strategy ready to go should it come to pass. A trend born of risk aversion next week would start with a significant break which would offer some time to sort options. That said, a lower probability (in my view) productive ‘risk-on’ trend has few willing representatives. The emerging market FX currencies are one exception – USDMXN, USDZAR and even USDBRL are pairs I’ve followed recently.

Chart of USDMXN with Inverted EEM Emerging Market ETF Overlaid ( Daily)

USDMXN and Emerging Market ETF

Chart Created on Tradingview Platform

If, on the other hand, we fall back into congestion, there are plenty of candidates to consider. However, I’m less interested in the false-break-reversal candidates like the S&P 500 or AUDUSD as they will have undermined the guidance in the technical guidelines. I mentioned EURUSD and USDCAD in yesterday’s video and they both still represent good options for that outcome – though they have already retraced significant ground. NZDUSD is in a similar cut with well-established technical levels and hasn’t committed to too much retreat.

NZD/USD MIXED
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Change in Longs Shorts OI
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Weekly 10% 21% 17%
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Chart of NZDUSD with 100-day Moving Averages (Daily)

Chart of NZDUSD

Chart Created on Tradingview Platform

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