[embedded content]

SPY S&P 500 ETF, Tesla, USDMXN, USDCAD and AUDJPY Talking Points

  • Risk appetite opens with a favorable (ie bullish) bearing, but momentum is hung up on the anticipation around Wednesday’s FOMC rate decision
  • Concentrated and isolate risk trends have lifted the likes of Tesla but progress in many top liquidity measures will likely struggle until the Fed deliberates
  • USDMXN and SPY continuation looks suspect given fundamental anticipation; but USDCAD, Aussie crosses and Tesla seem to be in a different stream

Risk Trends Are Buying Time…To the FOMC

Speculative appetite showed up through the opening session of the trading week and month. That is right in line with seasonal expectations and the existent trend, but it is also anathema of the anticipation baked into the markets. There is a very clear highlight on the macroeconomic docket ahead – in the form of the FOMC rate decision on Wednesday – which is likely an anchor of speculative intent through the immediate future and a potent catalyst for markets just over the horizon. That creates something of a speculative dead zone through the immediate future, but a it is also an environment for which we should know the score. While the S&P 500 (below the SPDR ETF) may have advanced on a technical basis – a meager 0.2 percent close-over-closer – there was minimal progress to speak of. I suspect that to remain the case until this week’s top event risk is in the record books.

Chart of SPY S&P 500 ETF with 50-Day SMA and 10-Day ATR (Daily)

Chart Created on Tradingview Platform

If trading will be difficult through the next 24 to 48 hours, it is important to throttle expectations. I am not of the opinion that there will be an easy path for ‘risk appetite’ to simply charge forward in the absence of fundamental clarity. As we await the systemic to be clarified – such as the underlying current for global monetary policy and/or the bearing for global growth – there will remain a focus on the fringes for out-sized moves. There aren’t many outliers in the speculative rank at the moment, but Tesla seems intent on leading the charge. The EV maker extended its charge with an 8.5 percent rally Monday that pushed the stock price to a point of excess relative to the 20-day moving average not seen since the beginning of the year. That may be a sign of an overextended market, but it is also a concentration of speculative hierarchy that traders should take note of.

Chart of Tesla with 20 and 50-Day SMAs, Volume and 20-Day SMA Disparity Index (Daily)

Chart Created on Tradingview Platform

When it comes to TSLA, I believe that the market can continue to run despite the fundamental imbalance towards anticipation. Yet, when looking to other ‘risk’ oriented measures; my allowance for run is under greater scrutiny. One such market to consider is USDMXN. This exchange rate is a speculative benchmark, but its climb seems to contradict the same rally registered for the likes of the S&P 500. A six-day rally for the cross seems to prize a safe haven currency – but it may very well be recognition of the US tightening shift ahead – but the subsequent day’s rally seems to hold serious technical and fundamental implications. Further gains in anticipation of the Fed decision would be a serious coup, while the clearance above 20.90 would entail breaking a larger descending wedge. While not nearly as like as EURUSD, this is perhaps a Dollar pair that earns more attention from rates observers and certainly FX traders.

Chart of USDMXN with 200-Day Moving Average and Consecutive Candles (Daily)

Chart Created on Tradingview Platform

The Importance of Anticipation – Seasonality and the FOMC

While we await the next speculative and fundamental wave, traders would do well to register both seasonality and the fundamental docket. I am a believer in both influencers. For the former, the month of November represents a meaning downgrade in volatility and volume (based on the S&P 500) while speculative appreciation tends to gain traction. The ‘holiday rally’ aphorism exists for a reason. On a more granular basis, the broad US index that tends to stand in for ‘risk’ average a top performance in the second half of the year during the 44th week of the year (the week we are currently traversing).

S&P 500 Performance by Week from 1900 to Present

Chart Created by John Kicklighter with Data from Bloomberg

As statically-relevant as the current period may be, fundamental matter a lot when it comes to establishing what our future has to hold. As it stands, the next 24 hours seems to be genuinely rooted in a ‘wait and see’ mentality as the scale of market moving potential event risk thins out significantly. That is in contrast to the weight that Wednesday’s FOMC rate decision carries. Such an event alone represents the kind of update that can unilaterally change the collective investors’ outlook. This an important aspect to account for when determining what kind of trading strategy to employ. Though look for breakouts with follow through will find the going particularly difficult and dependent on a particular event scheduled for Wednesday afternoon (Washington DC time). In the interim, trading choices should be particularly targeted.

Calendar of Major Macro Event Risk for the Week

Calendar Created by John Kicklighter

Markets to Watch

Generally-speaking, I am not particularly enamored with assets that draw on ‘risk trends’ for their course for the immediate future. The need to establish a clear speculative view means the FOMC decision needs to clear and integrate into a bullish or bearish view. USDCAD is no exception, but its potential is worth highlighting. The cross managed to hold fast through this past session’s manufacturing activity updates. The US ISM manufacturing report slowed from the previous report with a downshift from 61.1 to 60.8, but that was better than the 60.5 reading expected – and notably sporting a charged inflation component. Meanwhile, the Canadian factory activity measure from Markit accelerated from 57.0 to 57.7 over the same period (October). This was not decisive enough to resolve one of the lowest readings of relative volatility (5-day ATR relative to 20-day) in recent history. A breakout is coming, but it is best served by a scheduled catalyst.

Chart of USDCAD with 50-Day SMA and 5-Day/20-Day ATR (Daily)

Chart Created on Tradingview Platform

Another, technically-charged FX cross is AUDJPY. This holds both the technical and fundamental charge necessary to interest opportunists like myself. From the charts, we can see the consolidation into the 86.00/25 resistance building over these past two weeks with an inevitable resolution ahead. Add to that scenario spectrum a fundamental mix that connects the carry trade to risk trends through the Fed decision while the Aussie Dollar’s course tracks the RBA’s own policy setting, and there looks to be a near-term breakout candidate on hand.

Chart of AUDJPY with 20-Day SMA and 5-Day/20-Day ATR (Daily)

Chart Created on Tradingview Platform