S&P 500, EURUSD, Dollar and VIX Talking Points:
- US markets were back online after an extended holiday weekend with reversals from the S&P 500 and Dollar noticeably undercut
- Neither China’s better-than-expected GDP update nor Janet Yellen’s remarks to support a large US fiscal stimulus would land for systemic risk movement
- The Dollar’s recovery has stalled just as surely as the S&P 500’s bearish reversal, but perhaps the inauguration, earnings or another key theme will catch traction
US Markets Return After an Extended Weekend and Curb a Tumble Along the Way
After a long weekend in the United States, the markets were back up to full liquidity this past session – and the downtime seems to have averted a full risk deleveraging as well as disrupt a Dollar recovery effort. It could be argued that both trends were tall orders given the markets’ prevailing appetites and the limit of systemic event risk, but liquidity is ultimately one of the most omnipresent influences in markets, so it can be difficult distinguishing intent from mere loss of traction. One way or the other, it was clear from the S&P 500 that the tentative break lower registered this past Friday – a move that unfolded despite the Biden campaign announcing intention for a massive $1.9 trillion stimulus program – was not the spark for a persistent trend. It is worth mentioning for chart watchers that we never came close to 3,700 in this slide nor did the Dow or Nasdaq 100 tip the proverbial scales into the bears’ favor during this initial move.
Chart of S&P 500 with 20-Day Moving Average and Divergence (Daily)
Chart Created on Tradingview Platform
While the major US indices have been the prevailing market benchmark over the past decade in performance terms, I like to keep tabs on the ever-changing core of speculative interest among increasingly-stretched market participants. Recently, that focus has shifted from FAANG to a more concentrated asset mix. As it happens, member of the acronym Netflix reported a miss in earnings per share ($1.19 vs $1.38 expected) but a stronger increase in new customers (8.5 million subscribers) which led NFLX to trade over 12 percent higher after hours – though I think the real lift would come from chatter about planned share buybacks. Meanwhile, top performing stock Tesla and ‘currency’ Bitcoin both continue to carve out diminishing congestion patterns.
Chart of Bitcoin with 20-Day Moving Average and 10-Day ATR (Daily)
Chart Created on Tradingview Platform
Dollar’s Reversal Another Victim of the Liquidity Drain
The lack of follow through on the US indices Friday technical breakdown is not exactly shocking. There is a prevailing trend that cannot be ignored, but it is generally difficult to urge a full-scale reversal regardless of the direction. Without a clear motivation for fear to pick up the slack this week, such a move would struggle to gain traction. If reversals are difficult to establish, then the Dollar’s efforts to rouse a bullish recovery would face the same struggle. Indeed, the DXY Index attempt to mount a true reversal from multi-year lows similarly put upon. For those looking for a fundamental tripping point, perhaps the loss of traction on safe havens was the undoing. Then again, we were also facing a reminder of the stimulus equation. Former Fed Chairwoman Janet Yellen was testifying before the Senate in her confirmation hearing for the Treasury Secretary job under incoming President Joe Biden. She supported the need for “big” stimulus but she would also shy away from outright support for the so-called ‘strong Dollar’ position so many of her predecessors took.
Twitter Poll for US Stimulus Program Supporting a Dollar Bullish or Bearish Outcome
Poll from Twitter.com, @JohnKicklighter
Taking a technical look at the Dollar’s position, there were a number of crosses (so-called ‘majors’) that hadn’t marked the technical tipping point; but the EURUSD drew enough interest all its own to rouse speculative belief. We can see this benchmark’s influence at work in the trade-weighted DXY Index which had very tentatively cleared the ‘neckline’ on an inverse head-and-shoulders pattern but had plenty of technical overhead to make the climb less than certain. Following Monday’s shooting star-like candle and the slide this past session, it was clear that speculative intent had lost traction.
Chart of DXY Dollar Index with 50-Day Moving Average (Daily)
Chart Created on Tradingview Platform
Always Have Options: Dollar Bull and Dollar Bear
I am a person that evaluates the future in probabilities. It is possible that the Dollar revives its effort to regain serious traction or that its recent bounce was merely a reprieve in a persistent bear trend. Timing for any conviction is a consideration, but if bearing is chosen relatively soon, I see pairs that hold both the technical and fundamental suitability to mull more closely. Should the Greenback have merely slipped this past session, there are a host of crosses that are worth a closer look. AUDUSD and NZDUSD trendline breaks are two such pairs worthy of consideration; but no cross carries the same heft as the FX market’s most liquid pair: EURUSD. While it bounced at the 50-day moving average and 38.2 percent Fib of the past three month’s charge, it is still below the long-term 1.2150 midpoint. If there were ever an argument for the influence of technicals, this particular level on this particular pair would qualify.
| Change in | Longs | Shorts | OI |
| Daily | -1% | -4% | -3% |
| Weekly | 4% | -10% | -5% |
Chart of EURUSD with 50-Day Moving Average (Daily)
Chart Created on Tradingview Platform
If the Dollar’s bounce was simply that, there are just as many pairings that show the prevailing bear trend at the market’s back. In a strong correlation to EURUSD, USDCHF (Dollar – Swiss Franc) is the mirror to the benchmark and it never cross the technical threshold in the Dollar’s favor. Then again, the Greenback is still as weak here as it is anywhere else. I don’t think there are any pairs where the Dollar is holding onto much excessive premium at present. One pair to watch though is USDCNH. While many – including myself – take the 4Q Chinese GDP beat (6.5 percent which left this the only major country to manage positive growth in 2020) with a grain of salt, it could speak to the intent of authorities. If the multi-month trend channel that now finds a top around 6.50 is seen as a priority for policy, the level could find unnatural influence.
Chart of USDCNH with 50-Day Moving Average (Daily)
Chart Created on Tradingview Platform
What Still Holds the Potential to Trigger Volatility and Market Momentum?
With so much checking against speculative conviction, it is always important to ask what exactly carries the potential to motivate the markets to a genuine trend? I maintain that the greater potential for a sweeping move would be one that leans towards full risk aversion rather than risk appetite. Markets are riding well beyond what many would consider traditional value, so squeezing further gains is not particularly easy. On the other hand, seeing the excess topple can happen by mere loss of enthusiasm. In a mirrored view, the VIX is unlikely to break lower but holds serious historical precedence of a charge from ‘congestion’ to the upside – a ‘risk aversion’ move. While I’m still watching measures of GDP, the coronavirus and earnings this week; Joe Biden’s inauguration will stand as an event to watch. While typically considered mere routine in the democratic process, the storming of the capital during the electoral college vote count suggests we can’t take it as a foregone conclusion. If there is another bout of tumult, it can undermine US assets. Otherwise, the default will be a non-event that will nevertheless cap speculative intent as it passes.
Chart of VIX Volatility Index (Weekly)
Chart Created on Tradingview Platform
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