Dow and Dollar Talking Points:
- We have left behind both the Thanksgiving holiday week and the month of November, with deeply rooted expectations for seasonality ahead
- Risk trends were on a mixed footing Monday to end the calendar month, but the overall trend for the likes of the Dow are hard to ignore
- The Dow has closed out its best month since 1987 while EURUSD is sporting both a range and a break that may prove a platform for follow through
Seasonality Plays Out and Contributes to Serious Assumptions
This beginning of this trading week has brought both a transition from the Thanksgiving holiday lull back to standard liquidity as well as the equally-loaded seasonal shift from November to December. There is a lot of speculative assumption built into this combination and an active fundamental backdrop pressing expectations for the potential in liquidity and volatility over these coming week. With so much seasonal and discrete influence at hand, the uncommitted backdrop for risk trends Monday was perhaps a little more understandable. With an accompaniment of retreat in global equities, emerging markets, carry trade and growth-linked commodities; US indices like the Dow Jones Industrial Average posted their first gap lower in five trading days and measurable retreat below the lauded 30,000 mark of last week. Yet, should we consider this any more indicative to intention of trend than the effort last Tuesday to forge higher?
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Chart of the Dow Industrial Average with 20-Day and 200-Day Moving Average (Daily)
Chart Created on Tradingview Platform
While I am a firm believer in both fundamental and technical analysis, it seems to me that seasonal influences should be considered first and foremost for a fully comprehensive assessment of the market’s potential. Using the S&P 500 and VIX as backdrop, December is known as a period with a significant reduction in both volume and volatility that has averaged a healthy gain from the underlying equity index. Those that favor such statistics may be further emboldened by the fact that 2020’s top two months (April 12.7 and November 10.8 percent) match the relative averages from history. It further is worth mentioning that five of the past seven years have seen SPX pushing a record high heading into December. Yet, taking the big picture down for a moment, we have approximately three weeks of full liquidity ahead (before the weeks of Christmas and New Year’s Day). There is plenty of time for matters like a Covid vaccine or economic stall to unfold in that period.
Chart of Seasonal S&P 500 Performance, Volume and VIX
Chart Created by John Kicklighter with Data from Bloomberg
Two of the Most Impressive Monthly Charts to Contemplate
Despite the hesitancy I have around the standing in risk trends moving forward, there is little denying just how impressive November was for the US indices. In particular, the Dow posted its biggest monthly rally since January 1987. I try to highlight such remarkable historical performance metrics without drawing conclusions as to what it will mean going forward. However, I would note that this advance finds the benchmark back at record highs after recovering from the fastest drop into recession and a ‘bear market’ on modern record. Further, it has been notched with a fundamental backdrop that is notably unstable. While not a fan of self-sustaining momentum (it is an dangerous assurance), there is no mistaking the effectiveness of the charge thus far. A few matters may present firmer stepping stones in the near future – the distribution of the Covid vaccine and US stimulus – but assuming this support is presumptuous.
Chart of the Dow Industrial Average with 1 Month Rate of Change (Monthly)
Chart Created on Tradingview Platform
Another remarkable monthly chart on the higher time frame is the general stance of the Dollar. The DXY Index shows a currency that is technically faltering through decade-plus support, but the tipping point manifests differently in different crosses. From EURUSD, my focus is typically on the daily time frame and lower which calls up a fairly consistent trading range between 1.2000 and 1.1600. To swing traders, this seems pattern to put some weight behind which is what the IGCS suggests many in the retail crowd. Yet, consider what the monthly chart looks like. While the recent congestion is still visible and some layers of resistance show between 1.2000 and 1.2150; the picture looks more like a familiar test of a former major technical barrier (resistance) that now takes on the form of a possible launching point (as new support) for a next stage.
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| Change in | Longs | Shorts | OI |
| Daily | 9% | -16% | -1% |
| Weekly | -11% | 22% | -2% |
Chart of the EURUSD (Monthly)
Chart Created on Tradingview Platform
Contrasting perspective of time frames is important to distinguish. While the span of some months may ultimately see the fulfillment of a Dollar slide should US stimulus, growth and coronavirus response underwhelm for example; if a market participant doesn’t engage the market through that level of duration, it is an impractical application. Many retail traders approach markets with a much shorter duration, which translates through positioning that we see on the likes of EURUSD or AUDUSD below. FX traders with IG are leaning against the range boundary and presuming a swing lower. It may very well be the case that we see a break, but follow through given the market’s commitment to trends recently shifts the potential/probability ratio I typically consider.
| Change in | Longs | Shorts | OI |
| Daily | 18% | -44% | -1% |
| Weekly | 2% | -28% | -5% |
Chart of AUDUSD and IG Client Positioning (8-Hour)
Chart Created on DailyFX.com
Another Dollar chart worth considering with a time frame between what I was looking at through EURUSD and AUDUSD is the weekly picture of GBPUSD. While we can see some of the technical context on the daily and much more than is perhaps necessary on the monthly, this mid-level time frame present a density of technical resistance around 1.3400/3500 – trendline resistance back to the Brexit vote, Fib overlaps, zone pressure to mid-2018 – that can give chart representation to the lack of clarity around the trade situation in the UK.
Chart of the GBPUSD with 20 and 200-Week Moving Averages (Weekly)
Chart Created on Tradingview Platform
Safe Havens that Aren’t Safe Havens
While the last day of November showed considerable throttling for risk assets and havens alike, it was worth noting a few exceptional exceptions. On the risk side, Tesla started with an extension of its incredible charge to market cap explosion, but the risk measure that was really standing out for me was Bitcoin. The most recognizable cryptocurrency pushed a record high through Monday’s active session and drew tantalizingly close to $20,000 (though it didn’t hit Monday). There are some that consider this a haven that draws on its alternative-to-traditional-fiat properties, but I believe that will require greater adoption to fulfill. More accepted as a haven is gold, but it too has seen an unusual correlation to direct risk assets like the S&P 500. The slide to start the week seems to look more traditional but it too may be temporarily caught in seasonal flows.
Chart of Bitcoin Overlaid with Gold (Weekly)
Chart Created on Tradingview Platform
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