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EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

John Kicklighter, Chief Strategist

Nasdaq 100, Bitcoin and EURUSD Talking Points:

  • While the Nasdaq 100 led some US indices to fresh record highs, there was a tangible lack of conviction – such as one of the most reserved SPX ranges in a year
  • EURUSD has technically closed above 1.2150 – the midpoint of the pair’s historical range – but such a break does no register as a burgeoning trend
  • As the inauguration relief rally passes and monetary policy updates prove ineffective as a driver, we now move into growth speculation with January PMIs
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A Record High S&P 500 Doesn’t Carry the Enthusiasm It Should

Fresh highs from the market’s lead for risk appetite – US indices – is drawing more scrutiny than relief among the market rank. There remains a noticeable disconnect between the undercurrent of fundamentals and the seemingly relentless charge of benchmarks lie the S&P 500 and Nasdaq. While political stability and support of monetary/fiscal stimulus stands a motivation for the bulls simply looking for justification, an application of true value is tracking far off the mark. That may not necessarily turn the market off course however as speculative inertia has proven one of the most unflappable motivations the market has seen in the past months and years. Nevertheless, there has been a check of reticence this past session. The S&P 500 may have edged out a fresh record, but it would come on the back of the most reserved daily trading range (during non-holiday trading conditions) in months.

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Chart of S&P 500 with 50-Day Moving Average and 1-Day ATR (Daily)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created on Tradingview Platform

Across the spectrum, risk assets were registering a much more reserve session Thursday than the day before, but there remained the tinge of risk appetite over ‘investment’ activity. One such highlight that registered for me was the further surge in the Nasdaq 100 relative to the S&P 500 which signaled a charge for tech shares within an already outperforming US equities space. The ratio of indexes is just off a record high of its own, which carries significant weight following the recent Netflix earnings charge and the anticipation for next week’s further FAANG run.

Chart of Nasdaq 100 to S&P 500 Ratio

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created on Tradingview Platform

One leading speculative torch from recent months that fell on hard times just this past session was Bitcoin. The world’s most heavily traded cryptocurrency took a 13 percent dive Thursday that pulled many of its large counterparts lower alongside it. There was traditional fundamental fodder that traders looking for explanation could have pegged this move to, but that could also be ‘justification after the fact’. Reports that Treasury Secretary nominee Janet Yellen suggested cryptocurrencies should be cracked down on for its use in illicit activities certainly doesn’t bode well, but the suggestion of a critical flaw (‘double spend’) does more to undermine conviction in the market. These could be catalysts, but then again they may just be used to rationalize the retreat. I don’t know which would be more troubling for this asset’s outlook.

Chart of Bitcoin Overlaid with Tesla and 1-Day Rate of Change (Daily)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created on Tradingview Platform

EURUSD Closed Above 1.2150, But Neither Technicals Nor Fundamentals Suggest Trend

Another high profile but ultimately debatable technical break from the top tier financial rank was the EURUSD’s daily close above 1.2150. I conducted a poll in Twitter asking FX traders whether they believed the benchmark would break near-term resistance or support (1.2150 or 1.2050) first. It would seem the former were correct, but I wouldn’t be so eager to register such a committed move. While there is no doubt the pair has edged above this mark – a technical level with the weight of the pair’s historical midpoint – there is a very important difference between a break of ‘necessity’ and one of ‘commitment’. The latter is less committed to develop a trend, and that is what we seem to be witnessing at the moment. That isn’t to say a bull trend can’t prevail, but it would likely need more motivation to establish pace.

Twitter Poll Asking Whether EURUSD Will Break Immediate Resistance or Support

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Poll from Twitter.com, @JohnKicklighter

In the technical sense, we can see from the chart what kind of congestion we were facing. While the levels scoped out as resistance and support are significant, they are also very narrow. Finding a break is only a matter of time. From the price action registered on the break, it doesn’t seem there was much of a groundswell to follow the breach. Should we continue to rise towards – and above – 1.2200, skepticism will fall away, but that doesn’t ensure a refreshed enthusiasm to bid the market higher. Neither retail FX (with IG) nor futures traders don’t seem to be particularly decisive on their underlying positioning. The ECB rate decision this past session could have tilted the balance, but the hold on stimulus and lack of threat towards the Euro’s height seemed to sideline intent.

EUR/USD BEARISH
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Change in Longs Shorts OI
Daily 8% -10% -1%
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Chart of EURUSD with 50-Day Moving Average and 1-Day Rate of Change (Daily)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created on Tradingview Platform

Top Fundamental Themes to End the Week

Tracking the critical drivers and sparks through the end of this week and into next week, it seems US earnings session will hit its stride once again next week. This past session, one of the companies I watch more closely for a basic reading on economic activity, CSX, issued up an underwhelming earnings update. That seems to reflect the GDP picture well. Meanwhile, the Netflix charge that fed on the seeming assumption of pandemic immunity was holding on to its rally to record highs. I will be watching the other FAANG members report alongside the fad-favorite Tesla in the weeks ahead.

Chart of CSX, Tesla and Netflix (Daily)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created on Tradingview Platform

A more traditional fundamental theme that noticeably failed to engender a well-worn position of market charge was the run of central bank policy updates. Most notable was the ECB’s hold after its top off in stimulus and support through the end of 2020, but what markets seemed to be more concerned about was President Lagarde’s warning of a double dip recession and her pulling back from an overt Euro threat after weeks of various officials dancing around their concerns over the currency’s level. Meanwhile, the Turkish, South African and Norwegian central banks managed limited market impact – the last of which actually offered the EURNOK a fresh multi-month low. And the potential rally from the Bank of Canada report the day before seemed to fully fall apart the after the modest bullish note.

Chart of Major Central Banks’ Balance Sheets in Billions of Dollars (Monthly)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created by John Kicklighter with Data from Bloomberg Terminal

For this final session of trade this week, my attention will focus on more traditional ‘GDP’. That will come through the first readings of January PMIs, which are meaningful proxies for more traditional quarterly reports from the governments. The expectation for a strong recovery to continue into 2021 remains a strong hallmark for some of the enthusiasm expressed in record highs for the likes of US indices. Given that it hits on a Friday, I see its potential as limited for serious movement unless there is a strong deviation from consensus – for relative movement but particularly for full risk trends on a collective basis.

Chart of Major Economy PMIs (Monthly)

EURUSD and Nasdaq 100: Are These Breaks Backed by Trends?

Chart Created by John Kicklighter with Data from Markit IHS

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