Because there has been such a strong correlation between some of the carry trade markets and U.S. stock indices, we are seeing more and more forex traders taking a closer look at the stock market as a proxy for the overall health of the U.S. economy.
Despite all the talk and odds-making regarding the possibility of a U.S. recession, the best indicator I know is still not showing recession. The S&P 500, while lower on the short-term trend on the daily chart, is still sideways on the weekly chart. As long as the S&Ps are above this horizontal line at 1400.00, which represents the summer lows, the long-term trend is up, and in my mind is not yet recessionary.
Chart courtesy of eSignal
For technicians it's easy to call this technical formation a head and shoulder top. I follow macro trends by gauging pertinent fundamentals and market momentum more than pattern recognition, so the old H&S pattern doesn't carry much weight with me - other than the horizontal line I've penned in on the first chart which can also be called a neckline.
I've also included below a weekly chart of the S&Ps from 2000 where we see the trend shift marking the beginning of the bear market, which lasted until the Iraq invasion in 2003. Interestingly, that same 1400.00 level, when breached in 2000, gave us the turn.
Chart courtesy of eSignal
It appears that we are indeed at a crossroads now just above that familiar 1400.00 level. Itâ€™s tempting to join the pessimists at these levels, but in my mind it can go either way. With the fundamentals of a slowing economy having so many traders already short, it would not take much of a bullish spark to light a rally. We saw this happen in September and then again in late November. So as fearful as I know investors are of a long-term trend change and a major stock market sell-off, so too are traders who are already short fearful of a short-term reversal higher due to heavy handed shorts having bigger positions then stomachs. In basic technical analysis, spelled out in my trading plan at www.brewerfx.com/jnorris/, we trade it like any sideways range. A close below 1400.00 on the daily chart is a sell signal.
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