S&P 500, Step 1 of a Downturn?

2 мая 2019 г.

Good Afternoon,

My name is Taylor Norboge, and I am the co-founder of Alchemy FX. I specialize in fundamental analysis for our nearly 2300 members and growing. This article will cover my fundamental and technical outlook for the S&P500, as signals taken from it are very useful to us as foreign exchange traders.

After 4 months of continued upside momentum, price for the S&P has just scaled back from the all time high of 2940. Since this price was hit, quite a bit of turbulence has come into play. The highly anticipated level of 3k was just too high of a target for the bulls.

Technicals: In the meantime, the S&P has had a formation build. This, as drawn in the chart, is known to us technical analysts as a rising wedge. Rising wedges will often be approached with the aim of reversals. Yes, it is a bullish continuation, however, traders will approach this with a bearish presentiment already in play.

What the formation itself says is that we’ve seen a strong response from buyers at the lows of this upward sloping trend line (ascending). We’re still seeing a positive bullish response at the highs of this wedge, however, I want to point something out. Notice that the pitch at resistance—the angle of this upper trend line—isn’t nearly as aggressive as the angle of the lower ascending trend line (support). What does this show? It shows the buyer excitement—the motivation and enthusiasm—is nearly as pronounced at the highs as it is (or has been) at the lows. That’s the type of scenario where the buying power will likely reign. This has started to play out over the past couple of days.

The FOMC rate decision yesterday and the press conference is paramount to not only understanding the fundamental side of this article, but also how this will transition into what we care about as foreign exchange traders. The initial response in the equity market was an initial test of the previous swing high in its market structure around 2940. This was also seen in the dollar index (DXY). However, after Mr. Powell stopped speaking, the equities market did not appreciate the rather hawkish tone from Powell, which was frankly unexpected by Wall street. This saw the Dollar (DXY) index tank alongside with a free-fall of the S&P to the bottom of the rising wedge mentioned above and in the accompanying chart.

This wedge, as with all wedges, are psychological in nature. A lot of our students find this to be a very hard concept to bridge, because although technically speaking they hold true, they are psychological in nature. This rising wedge was broken, which has allowed me to ascertain a very specifically inclined bearish approach for this forecast as of today.

So, we may very well have seen step 1 of the bearish reversal of the equity markets for the United States beginning to be priced in.

It’s early, there’s no guarantees , but you’ll hear it from me first; the bears are hungry— it’s summertime.

Tomorrows NFP is going to be very telling for this. The interesting backdrop for me personally behind all of this relating to this young bearish move in equities, essentially became about because the FED was more hawkish than many of the appetites of the most powerful institutions of WallStreet. Statistically speaking, yesterday there was a 68% chance of at least one rate cut by the end of FY19. As of this morning, that is down to 53% (Reuters 2019). We’ve seen how the markets misconstrued expectations around the FEDs tone has reacted impulsively. Interestingly, it was the same scenario that tilted equities last year in October when we opened up into Q4 18’. This hawkish sub-tone has resulted in the break of the rising wedge for the S&P.

Great, so what now? I think this is the early stages of a very significant structure shift for the equity market in the United States.

Tomorrows NFP (non-farm payroll) expectations is for a print of 190. This may be a case of where good is bad. If we see a higher print, it will be interesting to see how both equities and the Dollar stand true a day after the hawkish FOMC.