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USDJPY Traders Play the Range, S&P 500 Fails to Charge Breakdown

USDJPY Traders Play the Range, S&P 500 Fails to Charge Breakdown

John Kicklighter, Chief Strategist

S&P 500, USDJPY, Evergrande and Dollar Talking Points

  • The S&P 500’s slide below 4,450 – a long-running channel support – on Tuesday failed to generate any follow through this past session
  • While technical developments and seasonal assumptions offer sparks, it seems a definitive fundamental fire is needed would be the FOMC next week
  • A difficulty forging clean breakouts and a surfeit of event risk can amplify conditions for more active ranges which we see on a range of assets like USDJPY
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Lead Us Not Into Technical Temptation

I asked a question yesterday: was the technical bearish break from the S&P 500 the tipping point for a full breakdown on an incredible, 18-month charge? My appetite for more active markets would have liked to see the markets rollover, not for the bearish perspective but rather that is where momentum is more likely to gain real traction. However, we knew it would be a high threshold to urge such resilient (resistant?) markets without something more tangible to guide fears. And there doesn’t seem to be a scheduled event with a global-level magnitude on deck until we get to next Wednesday’s FOMC rate decision. That said, it is important to remain cognizant of the headlines should an unexpected debt ceiling issue or financial fallout from a source like China’s Evergrande catch so much dry tinder. In the meantime, the if we are failing to break well-established technical boundaries and intent for big shifts is being anchored to events further ahead, that sounds like the foundation for range conditions.

Chart of S&P 500 with 50-Day SMA and 1-Day Rate of Change (Daily)

Chart Created on Tradingview Platform

When Breakouts Fail, Ranges Can Proliferate

While some may see big reversals around every corner, it seems many in the market are more than comfortable with making a range call when big levels come into view. We can assume that there is an active effort to lean against the big break by the market’s resolution alone, but it is also possible to see the positioning in action in certain venues. Below is the retail positioning in S&P 500 CFDs at IG. There was a sharp reversal in positioning, from 75 percent of those with positions net short two weeks ago around record highs to essentially a neutral split as we hit the 50-day moving average. Total short positions are still remarkably heavy, suggesting an undercurrent of expectation; but for now there is also the largest number of long positions in at least a year.

US 500 Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily -5% 11% 0%
Weekly 0% -2% -1%
What does it mean for price action?
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Chart of S&P 500 Overlaid with IG Client CFD Positioning (Daily)

Chart Created on DailyFX.com

While there is much fanfare in the broader market around the S&P 500, the drama that is associated to its particular channel test doesn’t seem much different than what we find in a more persistent and horizontal range from USDJPY. In retail FX trading (again at IG), we can see the active results of range trading in both net positioning and the changes in both long and short legs. This past session, USDJPY managed to break below 109.50 and thus widen the most restrictive 20-day trading range on record. However, clearing one intense range would only lead the market stall at a larger wedge support and confluence of levels at 109.00. While all Yen crosses have a ‘risk’ lean to them, the further Dollar consideration here will intensify the Fed taper speculation focus.

USD/JPY Mixed
Data provided by
of clients are net long. of clients are net short.
Change in Longs Shorts OI
Daily 7% -1% 1%
Weekly -15% 5% 0%
What does it mean for price action?
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Chart of USDJPY Overlaid with IG Client CFD Positioning (Daily)

Chart Created on DailyFX.com

The Unexpected and the Seasonal

While I am keeping my attention and anticipation trained on the Fed rate decision next week(along with the updated forecasts due at the event), I hold open the possibility that that sentiment can commit to a genuine charge without the prompting of a scheduled event. From a seasonal perspective, the swell in liquidity expected post-Labor Day seems to be taking place. However, the averages for September and the individual weeks of the year (currently the 37th) have yet to convince market participants to unwind exposure in solidarity to historical trends. Yet, if something peripheral were to get the ball rolling, these same assumptions can lead many dip buyers and HODLers to withdrawal their holdout.

Chart of the S&P 500 Performance By Calendar Week Back to 1900

Chart Created by John Kicklighter with Data from Bloomberg

Speaking of unscheduled and unpredictable risks, there are a number of matters for which the market is playing down either on purpose or out of ignorance. The rise in Covid cases in numerous economic centers around the world isn’t translating into full risk aversion as the instance of lockdowns as a response has been dramatically scaled back. Nevertheless, it is a trend that should be monitored. Meanwhile, the US debt ceiling risk seems to have found politicians and investors experiencing a bout of amnesia as the seriousness of the Standard & Poor’s downgrade of the US sovereign rate was not that long ago (2011). As far as grey swans go, however, the warnings around China’s Evergrande are growing more acute. One of China’s largest property developers, the company has struggled to deal with significant bad loans; and now it is reported that Chinese banks have been warned that Evergrande is likely to miss an interest loan payment on Monday. Without substantial intervention from regulators that could tip off a large default – an uncommon event in China where bad debt is a substantial problem. Is this a global financial threat? It has significant capacity to hit that scale, but it should not be presumed.

Chart of Evergrande with 50-Day Moving Average and Volume (Daily)

Chart Created on Tradingview Platform

Top Event Risk for Thursday and the Dollar

Though the markets seemed to have been unburdened by concerns of significant fundamental developments this past session, there were a few meaningful updates to cross the wires. On the back of the US CPI, which failed to generate a decisive response from the US Dollar, there were equally snubbed inflation updates from the UK and Canada. In both cases, price pressures further climbed to a record 3.2 percent clip and 4.1 percent headline pace respectively. Neither Pound nor Canadian Dollar would register a serious bullish commitment despite the slow hawkish lean developing from the Bank of England and Bank of Canada lately. Given this reticence to move in the face of meaningful data, I am cautious on what can be achieved in the release of the data due today. Record New Zealand GDP offered a modest lift for the Kiwi and a wide employment miss for Australia hasn’t hit the Aussie hard. Top listing on my docket for Thursday is the US retail sales report due at 12:30 GMT. This is not an event that would override our principal concerns but rather could generate market impact by altering speculation around the Fed taper intentions. That said, I still don’t think the DXY will make any imminent bids to break 93 or 92.

Chart of DXY Dollar Index with 100-Day SMA, 7-Day Range (Daily)

Chart Created on Tradingview Platform

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