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Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

John Kicklighter, Chief Strategist

S&P 500, Crude Oil, Dollar and Bitcoin Talking Points:

  • The trading week opened to a modest ‘risk on’ that earned an S&P 500 break that doesn’t seem to solidify flimsy conviction
  • Retail traders as a group often make poor trading decisions, but their propensity for technical levels seems to align to recent range conditions
  • Sentiment readings are the most tangible fundamental theme through Tuesday with US consumer confidence top listing – but beware sheer risk trends and chatter on inflation

When a Technical Break Finds No Backers

The trading week has opened to a broad advance in assets that fall on the bullish side of the risk spectrum, but there was little fanfare to the move. Not only was the move particularly restrained for most assets – perhaps with the notable exception of the cryptocurrency space – but there was very little technical achievement to rouse the speculative ranks back into collective action. The magnitude of ‘break’ to top the charts off to star this week was perhaps S&P 500 clearing 4,185, a modest range resistance back to May 11th. That ceiling carries little weight when compared to the May 7th record high at 4,238. If that peak is scaled, the tone in the market could shift at least temporarily given the attention it would draw. However, a break without a fundamental backing that has international scope is likely to struggle in these conditions.

Chart of S&P 500 Overlaid with 20, 50 and 100-DMA, COT Net Spec Futures Positioning (Daily)

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart Created on Tradingview Platform

For market conditions, there was a particularly light economic docket to start this week with just a single notable US event (the Chicago Fed’s national activity index) and some Fed speak even worth mentioning. That does little to divert us from a structural course where a mature bull trend is struggling to find fundamental oxygen in such a thin atmosphere. Add to that the seasonal expectations of a moderate activity in May leading into the most restrained month of the year in terms of volatility (via VIX averaged out by month through its history), and reticence is an understandable state for these markets.

Chart of Average Monthly S&P 500 Return, Volume and Volatility via VIX

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart Created by John Kicklighter with Data from Bloomberg

When Markets are Ranging, What Type of Strategy Do You Pursue?

It would seem to make sense intuitively, but many traders will not match the type of trading strategy they employ to the market conditions they face. Many operate with the intention to overlay a single strategy that they believe is suitable for all market conditions. Or, the more enlightened will recognize that there approach does better in certain environments; so they can go long periods without trading until the stars align. Then there are the truly active traders that determine whether we are in a range, breakout or trending market and employ a strategy that they feel best suits that backdrop. The average retail trader responds to technicals, has a shorter time frame and fades trends. In range-based markets, that approach may actually align. Taking a look at S&P 500 CFD traders with IG, we can see the flip in net positioning with swings in both longs and shorts that aligns to tests of short-term technical range barriers. If we continue to avoid meaningful breakouts – much less trends – this doesn’t really stand as a contrarian signal.

Chart of S&P 500 Overlaid with Retail Speculative CFD Positioning from IG (8-Hour)

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart from DailyFX.com with Data from IG

Another retail CFD positioning review that shows fairly blatant range focus is the charge for US crude oil. Four nearly for months, the underlying commodity has struggled to make meaningful progress in its post-pandemic and brief negative plunge recovery. There is immediate resistance against 66.50 but the swing high at 68.00 is larger on my radar as the world continues to fret over inflation while headlines out of China speak to a ‘zero tolerance’ crackdown on commodity speculation in the country.

Chart of Crude Oil Overlaid with Retail Speculative CFD Positioning from IG (8-Hour)

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart from DailyFX.com with Data from IG

The First Tangible Fundamentals Waves of the Week

Monday’s docket left any significant market movement up to motivation from unexpected headlines or fixation on lurking systemic themes. As we head into Tuesday trade, it is worth paying attention to breaking news; but there will be a common thread in the economic docket to act as a more reliable motivator. In the data on tap, we are looking at a review of sentiment across the globe. There is consumer and busines sentiment data to be found from South Korea, Turkey, Brazil, Germany, the UK and the US. The top listing with the greatest international reach would be the Conference Board’s US consumer confidence survey. This speaks to the world’s largest economy and collective consumer in the entire financial system. It may be a few steps down the line to growth and interest rate forecasts, but a strong reading can certainly urge the market in that direction.

Key Macro Economic Event Risk Calendar

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Created by John Kicklighter

While a response from risk assets to the singular data point – or even from unforeseen systemic upheaval – is preferable for generating volatility, it is a lower probability endeavor. The Greenback in the meantime continues to face mounting technical pressure and a higher baseline of activity. The DXY Dollar Index has put in for a fifth session’s switchback to keep a very overt and narrow trading range. A break from the 90.20 – 89.70 range seems a high probability in the next 24-48 hours, but the real technical cues would be a little further out. To the top side, the 20-day moving average aligns to the six week descending channel top at 90.50; and lower at 89.50, we find a multi-year range floor. First we need to get to the border before we can break it.

Chart of the DXY Dollar Index Overlaid with the 20 and 100-DMA, 5-Day Range and ATR (Daily)

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart Created on Tradingview Platform

Not all markets are relegated to measured moves within tightly confined ranges. The cryptocurrency market continues to exhibit extreme levels of volatility – a critical reason I don’t think it should be considered an imminent replacement for genuine safe havens or traditional fiat. Over the weekend, Bitcoin led smaller market cap coins lower on the erosion of sentiment found through concern of DOJ and IRS interest in exchanges as well as the straightforward announcement from China that they were cracking down on crypto financial transactions and mining. That said, the space bounced on Monday – and not because Bitcoin was at a Fib. How much weight is put in a Tweet from Elon Musk that reported he had met to discuss with major North American Bitcoin miners switching to renewables or that famed investor Ray Dalio would rather buy crypto than a bond in this environment?

Chart of Bitcoin Overlaid with 20-Day Moving Average and 5-Day ATR

Dollar Awaits Sparks for Breakout as Retail Range Trades S&P 500, Oil

Chart Created on Tradingview Platform

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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