Talking Points:
• Markets transition from range to breakouts to trend with definable cues in trading activity
• A 'cold start' transition from inactivity (even extreme) to strong productive trends can prove capricious
• Markets that experience a steady climb in trading activity are more likely to clear technical and trend boundaries
See the DailyFX Analysts' 1Q forecasts for the Dollar, S&P 500 and other benchmarks on the DailyFX Trading Guides page.
Which is more likely to find its way to a meaningful technical break and subsequent trend in the foreseeable future: the Dollar or the S&P 500? Both face notable technical boundaries as their progress towards meaningful trends have been waylaid over the past month. Yet, their respective activity levels the past few weeks could not have taken more divergent paths. For the US currency, a rise in daily activity reflects the headlines striking a particularly troubling chord (growing trade uncertainties) - even if that has not translated into a clear and resounding trend. In contrast, the US equity index continues to carve out an alarmingly tight range at record highs and with a gaping contrast to fundamental value.
Market participants are inherently drawn to conditions that support extreme outcomes. For the US equity index which is carving out an extraordinarily tight range, the natural resolution is for a moderation that would translate into a rather easy breakout from the resultant technical congestion. Indeed, looking at previous nadirs for S&P 500 activity, reversions have proven violent and some the origin of significant trend. However, the tipping point does not occur immediately after its extreme value has been discovered. Periods of exceptional inactivity have lasted for weeks, months and on occasion even longer.
In contrast to the 'cold start' transition from dead markets to the extremely volatile, there is greater probability and momentum in transition with a market whose activity is building before the major technical milestones are broken. Using the traditional average true range (ATR), we find the Dollar's volatility has steadily risen even though that charge has not been applied to a clear and persistent trend. Markets are responding to the vague and unpriced risks of the US withdrawing from global trade with plenty of repricing for the currency to account for. While the shift to technical break and trend development may not prove as dramatic for the Dollar as the S&P 500, it is more likely given the progress. We discuss transitioning market conditions - particularly range to breakout and trend - with the Dollar and S&P 500 as guides in today's Strategy Video.
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