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S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

John Kicklighter, Chief Strategist

S&P 500, US Dollar, EURUSD, GBPUSD and USDCAD Talking Points:

  • The S&P 500 carved out an ‘inside day’ through Wednesday trade resulting in both a record high close and the smallest trading range since Dec 24th, 2019
  • While a breakout (bullish or bearish) is likely ahead, the build up in growth forecasts – from NFPs to ISM services to IMF forecasts – has done little to rally risk trends
  • Meanwhile, the US Dollar was still under pressure with EURUSD and via the DXY, but pairs like USDJPY, GBPUSD and USDCAD are starting to mark progress
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The S&P 500 Is Due a Break but Follow Through Depends on General Risk Trends

Looking ahead to Thursday’s New York trading session, it seems highly likely that the S&P 500 is due for a technical breakout. When I reference ‘breakout’, I consider it to be a resolution that can be either bullish or bearish, which is fitting considering the circumstances for this benchmark. Technically-speaking, the frequent baseline for risk trends in the US (and frequently the globe) closed at a record high. That said, the progress from Monday’s previous record was little more than 2 points. What’s more, this milestone was made on what is called an ‘inside day’. That is a technical instance whereby the range of the candle – in this case daily – fits within the previous session’s range. Tuesday’s range was already extremely narrow, so the 14.8 point range was truly incredible as the smallest trading scope (as a percentage of spot) since December 24th, 2019. In other word’s this is comparable to holiday trading conditions. Quite the juxtaposition to pushing record highs.

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Chart of S&P 500 with 100 and 200-Day Mov Avgs and Spot-200DMA Spread (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

While I do believe a break is ahead for the S&P 500, but that does not necessarily mean that we will inherently find follow through. We’ve been tracking to some noteworthy rumblings in relative market performance and disconnect from fundamental themes for the past week. It is certainly possible for an individual benchmark to break free and run without backup from other areas of the financial system, but it is an uncommon feat. The most reliable charge in my book is when different assets across different regions align for a ‘risk’ move. We have seen during the SPX and Dow’s climb inconsistent interest in other US indices, emerging markets, Treasury yields and carry trade. That inconsistency persists to today. Considering the stretch of event risk recently (Friday NFPs, Monday US service sector activity, Tuesday IMF growth forecasts) were all unabashedly impressive and the market was still unable to capitalize; it seems the greater risk that traction could come if fueled by risk aversion rather than risk appetite. That is not to say it will absolutely happen, but that is the skew in potency at present.

Chart of S&P 500, DAX, Nikkei 225, AUDJPY, EEM and HYG Year-to-Day (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

Where the Fundamental Pressure Is Building

The quick recap of why the absence of risk appetite is so remarkable given the backdrop of the fundamentals, we were told on Wednesday that the typically optimistic but cautious IMF expected the world’s economy to expand at its fastest pace since 1980. That is more tangible than the variable backstop offered by central banks and governments to step in with more stimulus, and yet notably less market-moving. In particular, the circumstances for the US bode even better with a 6.4 percent forecasted growth solidified by the fastest growth in the country’s service sector and the gangbusters NFPs for March that has bolstered expectations of a repeat in April. This would seem to pad expectations for what’s ahead, but has done little to materialize the gains. Perhaps there is concern over the implications for inflation and monetary policy walk back.

Table of IMF GDP Forecasts for Major Advanced Economies and Emerging Economies

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart from IMF World Economic Outlook April 2021 Update

While there is good reason to be dubious of the course ahead given the assumption of goldilocks conditions for years – and the pricing that comes with it – the Dollar looks well positioned to take advantage in multiple scenarios. If everything plays out to authority’s forecasts, it’s relative growth pace will be particularly attractive for international investment against the backdrop of President Biden reversing the country’s isolationism. Alternatively, if inflation arises, the expectations for higher rates is already factoring into Fed Fund futures and could make it a carry candidate in a world where most other regions would likely be stepping up to stabilize global conditions. In a worst case scenario where risk collapses, it is a haven. Consider that for the Greenback, but the short-term could still see a tracking of ebb and flow against measures like yield forecasting as can be seen below.

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Chart of DXY Dollar Index with 20-DMA, Overlaid with Fed Fund Futures Dec 2022 Forecast (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

Top Dollar Pairs to Watch for the Greenback’s Progression

When looking at the DXY or EURUSD (the principal component of the trade-weighted index) we find the US currency is still struggling – though its pace of retreat has slowed. There are signs from other crosses however that we may be soon facing a rebound so long as an off radar event doesn’t pick up the bearish mantle. USDJPY was one of the first and fastest to pull back this past week, but it has steadied as its 20-day moving average comes into view having stayed above this backer since mid-January.

Chart of USDJPY with 20 and 100- DMA Overlaid with US-Japan 10-Year Yield Spread (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

GBPUSD raises the stakes a little for progress over the past 48 hours. Whereas the baseline currency was little moved elsewhere, Cable actually dropped substantially. That seems just as much a factor of the Sterling’s retreat across board, but the liquidity of this pair can certainly spillover to other crosses. I will not get too excited of a critical shift in intent until we slip below 1.3600, however, which would take out a months-long rising trend channel support, key Fibonacci level and the 100-day moving average.

Chart GBPUSD with 100DMA Overlaid with Equally-Weighted Pound Index (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

For the most distinct technical development, USDCAD may be the unusual standout. This pair has not played the role of a critical mover among the majors frequently over the months and year, but it has happened that this pair has led the pack before. Technically, we have cleared the top end of a descending trend channel that is 13-months old. Yet, I have moved my technical barrier a few times before as previous breaks have found little-to-no follow through. If this is to be the guiding light for a reversal, the Greenback will need to mount a systemic move soon. Despite the potential, that is still difficult to muster.

Chart USDCAD with 100 DMA (Daily)

S&P 500 Due for a Break but Follow Through Depends on Spark, Dollar Turning

Chart Created on Tradingview Platform

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