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. It’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, we trade it like any sideways range. A close below 1400.00 on the daily chart is a sell signal.

DISCLAIMER: Forex (off-exchange foreign currency futures and options or FX) trading involves substantial risk of loss and may not be suitable for every investor. The value of currencies may fluctuate and investors may lose all or more than their original investments. Risks also include, but are not limited to, the potential for changing political and/or economic conditions that may substantially affect the price and/or liquidity of a currency. The impact of seasonal and geopolitical events is already factored into market prices. Prices in the underlying cash or physical markets do not necessarily move in tandem with futures and options prices. The leveraged nature of FX trading means that any market movement will have an equally proportional effect on your deposited funds and such may work against you as well as for you. In no event should the content of this correspondence be construed as an express or implied promise or guarantee from B.I.G. Forex, LLC and Brewer Investment Group, LLC or its subsidiaries and/or affiliates that you will profit or that losses can or will be limited in any manner whatsoever. Loss-limiting strategies such as stop loss orders may not be effective because market conditions may make it impossible to execute such orders. Likewise, strategies using combinations of positions such as spread or straddle trades may be just as risky as simple long and short positions. Past results are no indication of future performance. Information contained in this correspondence is intended for informational purposes only and was obtained from sources believed to be reliable. Information is in no way guaranteed. No guarantee of any kind is implied or possible where projections of future conditions are attempted.