S&P topping out, USD bottoming out?

S&P selling below 1130 and DX bouncing off 79.74 has technical significance. Already short S&P from earlier this morning and now I’m going back short EURUSD as well.

The S&P 500 is selling off of January highs around 1150, which is a potential right shoulder forming. Additionally, since the Flash Crash, it has been consolidating in the form of a rising wedge. We have now hit the resistance trendline from the wedge, which suggests we’re headed down back to the support line and then through it. The support line extends all the way back to late 2008, so it would indicate a return to bear mode. 1130 was the support level for the most recent breakout/consolidation, and with that near-term support level broken, it looks attractive to label 1150 as an interim high.

Going forward, especially if S&P starts to decline, I will be paying close attention to the 1020 level. The S&P first breached that level in early 1998, but since then the level has demarked crisis/bear territory from normalized/growth territory. The first dip below this level came later in 1998 during the Russian financial crisis. Fed-originated liquidity came to save the day, however, and the market reversed course back upwards and through the level. The next time this happened was after 9/11, but again the Fed came to save the day and markets rallied back through the level into normalized territory. We broke back below it in summer 2002, when the hangover from the liquidity injection exposed an economy still mired in recession as well as a new war and multiple accounting scandals. It was back in crisis mode, defined as when markets are discounting abnormal growth environments without substantial last-resort policy. The Fed responded with a massive 50bp rate cut in November and the Bush Administration announced tax cuts in May 2003. The Fed cut fed funds a further 25bps in June, bringing it down to a mere 100bps. After August & September meetings resulted in rates staying low, the Greenspan put mentality started developing and after a third straight month of 100bps fed funds, backstopping by the Fed became implicit and underlying growth drivers were effectively replaced by Fed-injected liquidity, with 1020 being taken out again that month, to the upside. We continued on that growth path until the crash of 2008, which brought the economic system back on life support. After more liquidity and policy response, the economy started normalizing again and by summer 2009, crisis mode had abated and once again, we were back above 1020. We’re at the stage where we are stress-testing the current economic dynamics and determining if they still require emergency policy to have a normalized growth environment. If we break below, that will mean we will need further easing just to bring us back to a non-crisis period. Every bailout/bout of easing makes the consequent expansive phase successively weaker, as a function of the declining GDP generation by each marginal dollar of debt. The last expansive period was extremely weak and in fact non-existent in the labor market and consumer credit market. If we break below 1020 and enter crisis mode again, the upturn caused by reactionary policy may be even weaker, and possibly non-existent or the beginning of a new status quo.

All pure speculation but enough of a reason to keep an eye out on how the market plays with the 1020 level. No need for Armageddon scenario investing, but important to realize when markets are fine by themselves and when they’re reliant on policy just to remain functioning normally.

The DX is bouncing off 61.8% Fibo support, retracing the late 2009-early 2010 USD rally. DX is back above 80, so looks like we may be setting in an important low in the dollar here.

OPEN TRADES

Long /ZW | 701.00 | stop 674.50 | +1.68%

Long BVN | 41.20 | stop 39.85 | +1.94%

Long USD/CAD | 1.0285 | stop 1.0200 | +50 pips

Long /ZN | 125’15 | stop 124’20 | +0’08

Short AUD/CHF | 0.9490 | stop 0.9555 | +80 pips

Short AUD/CAD | 0.9850 | stop 0.9920 | +25 pips

Short NZD/USD | 0.7335 | stop 0.7370 | +50 pips

Short X | 44.80 | stop 45.80 | +1.56%

Short /ES | 1130.00 | stop 1135.00 | +1.10%

NEW TRADES

Short EUR/USD | 1.3350 | stop 1.3425

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DISCLAIMER: Nothing contained anywhere in this commentary, including analysis and trade ideas, constitutes or should be construed as investing or financial advice, suggestion, or recommendation. Please consult a financial professional and do due diligence before engaging in any purchase or sale of securities.

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