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Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

John Kicklighter, Chief Strategist

QQQ Nasdaq 100 ETF, VIX, Dollar, USDJPY and EURUSD Talking Points

  • A 1.9 percent drop from the S&P 500 this past week deviated from the historical average of the opening week proving the best of the trading year
  • Nasdaq 100 managed to hold a major support at the end of this past week while USDJPY slipped its own near-term support as a risk and monetary policy measure
  • Top fundamental theme as a market driver over the coming week is monetary policy with the Fed outlook finding daily milestones to stir speculation

Risk Trends Off to a Rough Start to 2022

Historically, the opening week of a new year produces a favorable – and often strong – wind for bullish interests. That doesn’t seem to the be case for 2022. Looking back through history (1900 to present), the benchmark S&P 500 has averaged a 1.0 percent gain through the opening period which is in turn the best performance of the 52 weeks of the calendar year. This time around, the index closed -1.9 percent lower despite hitting a record high through the period. Though this is a disappointing turn for a measure that is often used as a barometer for the market at large, I won’t read too far into it just yet. With a seismic shift in monetary policy, a natural moderation in economic expansion, lingering risks from the coronavirus and recognition of ample leverage throughout the financial system; there is plenty of fuel for any fires that start. That said, it is general best to wait until the speculative bonfire is lit. On that front, the QQQs (the Nasdaq 100 ETF) could be a good measure of escalation. The tech-heavy index that outperformed in 2021 will start the trading week contemplating serious support. Friday slipped the 100-day moving average, but the combination of a multi-week range floor and the midpoint to the October-November range falls around 378.50. After that, the trend channel floor back to May 2020 stand at 375 and the ‘technical correction’ from all-time highs is 367.84. Where will your conviction of a turn kick in?

Chart of QQQ Nasdaq 100 ETF with 100-Day SMA, Volume and 100-Day Disparity Index (Daily)

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Created on Tradingview Platform

Ultimately, the Nasdaq 100 and S&P 500 are single measures of a very broad and complex picture of sentiment. My preference is to reference the correlation across and intensity of multiple speculative assets to gauge an undercurrent of adding to or withdrawing from ‘risk’. Another universal measure is the activity considerations underlying the price component. Liquidity and volatility are arguably more influential in driving the financial system than a technical development or the unfolding of a fundamental theme. As we move into normal market conditions from holiday trade, volume is filling out but volatility is holding relatively steady for now. Volume and volatility tend to have a positive correlation while measures of risk bearing (like the S&P 500) generally present an inverse relationship. This creates a skew whereby the probabilities support the prevailing bullish bearing, but the far more intense move would follow a reversal.

Chart of Average Historical VIX by Weekly Overlaid with 2021 (Weekly)

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Made by John Kicklighter with Data from S&P

The (Known) Market-Moving Sparks for the Week Ahead

Looking ahead for the individual fundamental triggers and the broader themes; the first round of major central bank rate decisions, the full swing of the US earnings and beginning of 4Q GDP statistics – systemically-important event risk – are still some weeks out. That said, there is still enough on the docket to generate some concentrated volatility and perhaps even tip the larger scale of market-wide sentiment. The greatest volatility threat on the radar are those events that will trigger further speculation around the Fed’s intended tempo to tighten. On that front, we will see a meaningful update every single day of the week. Monday brings the New York Feds consumer inflation expectations survey. Tuesday has the three most hawkish Fed members (Mester, George and Bullard who are all voters) due to speak on economic activity and monetary policy. Wednesday holds the top listing for the week in my opinion – the market’s preferred inflation indicator, the CPI. Thursday produces the upstream PPI figure which can get closer to the supply chain constraints as well the Senate Banking Committee’s hearing on Lael Brainard’s nomination, where she will no doubt be quizzed on her dovishness. Then Friday will offer up US consumer confidence and spending. While there are other indicators of note – Eurozone unemployment, Chinese investment and US bank earnings – the Greenback’s dance card is the only one that is overtly full going in.

Economic Calendar of Major Global Event Risk

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Calendar Made by John Kicklighter

From scheduled event risk to more comprehensive themes, the uncertainties around China’s handling of Evergrande and its property sector as well as the omicron variant’s spread across the globe can pose unexpected but overriding threats to market activity. That said, it will be difficult to wrest control of the market’s attention away from the underlying shift in monetary policyv. The Fed’s sudden hawkish reversal in December – and the market’s acknowledgment of the turn this past week after the minutes – casts a broad light across global policy. A possible four rate hike 2022 and March start may make the US central bank the most hawkish of its major counterparts, but it is far from the only one looking to pull back from the extreme accommodation. The more outfits that taper, hike and/or reduce their balance sheet; the more profound the threat to risk trends that have built a foundation on the belief that extremely easy policy was a reason to keep building risk exposure.

Chart of Perception of Relative Monetary Policy Standing

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Created by John Kicklighter

The Dollar’s Monetary Policy Sensitivity Carries a Skew

In the past week alone, we have seen a sharp escalation in US rate speculation. I find it ironic that the FOMC minutes which essentially reiterated what the Fed and Chairman Powell stated back on their December 16th policy decision/presser seemed to trigger the biggest charge in expected tightening. Nevertheless, we have seen the probability of four rate hikes in 2022 swell to above 80 percent while the first hike has shifted forward from September to June to March. That said, there are points of reasonable skepticism that have arisen in the ISM manufacturing’s prices paid; but I believe the biggest market disparity to consider is the Dollar’s inability to match the rate climb these past weeks. The ICE’s DXY trade weighted dollar index has chopped side ways for almost two months. If a hawkish shift isn’t lifting the currency, could a dovish cross wind knock us loose?

Chart of DXY Dollar Index Overlaid with US 2-Year Yield with 20-Day Correlation (Daily)

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Created on Tradingview Platform

My favorite expression of the US Dollar remains the USDJPY short side view. Fundamentally, this cross has two enormous drivers to consider: Fed interest rate expectations (as the BOJ is anchored) and risk trends. The Greenback’s carry status matters significantly higher, but the build up in these Yen crosses is heavily dependent on the ebb and flow of interest around yield forecasting. Since I consider risk trends and US rate forecasting both stretched, the scenario could find motivation through different developments. The pair has already dropped through 115.65 support, but a deeper reversal could use the 61.8 percent Fib of the past 8 year range at 115.45 as a subsequent cue.

Chart of USDJPY with 50-Period Moving Average (4-Hour)

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Created on Tradingview Platform

Meanwhile, EURUSD continues to draw my attention for its incredible consolidation. In the past 38 trading days has moved in a range less than 175 pips. That is fairly extreme for this very liquid currency pair. While the disparity in monetary policy is a remarkable consideration for this cross, the sheer liquidity of this two individual currencies exerts a serious influence on trend developments. Nevertheless, I believe this cross is due a break; and the longer the resolution takes, the bigger the ultimate drive. I still prefer a 1.1400 bullish break to a bearish 1.1200 clearance, but time will tell which direction the market chooses.

Chart of EURUSD Overlaid with 50 and 100-Day SMAs, 35-Day ATR and Historical Range (Daily)

Probability of Nasdaq 100 and Dollar Breakdowns Next Week

Chart Created on Tradingview Platform

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