In terms of FX markets direction is being influenced by stock markets as risk currencies hold firm as stocks remain bullish but volatility is low and if stocks were to break, then this could ignite a big USD rally. The analysis below covers the SP500 and DAX which could offer good risk to reward swing trades short…
We have huge volume in the stock market as retail traders build up significant long positions as we noted in our previous posts – these positions were built upon two impact events – Joe Biden winning the US election and the euphoria about a vaccine. While the majority don’t see risk on ending there are plenty of warnings for a near term correction and one is potential capital outflows:
Heading into Nov month-end, QDS’ Pension Rebalancing Model suggests c.$50bn of global equity outflows. Also, JP Morgan notes: “We see some vulnerability in equity markets in the near term from balanced mutual funds, a $7tr universe, having to sell around $160bn of equities globally to revert to their target 60:40 allocation either by the end of November or by the end of December at the latest”
Also, if we look at sentiment indicators we have extreme bullishness as per the charts below and options traders will need to adjust positions. The SP500 has defied many with its strength but now with traders and investors so bullish we should be alert for a correction. Key levels on the chart below to watch. The DAX also could offer a good risk to reward short swing trade if key resistance holds as per the chart below.
SP500 DAILY CHART:
We are seeing the SP500 again rise to take out the multiyear close and possibly the spike tail high but the odds of a correction look high – if we break nearby support we expect follow through selling to correct the bullish extreme.
DAX INDEX DAILY CHART:
We have seen a strong move up in the DAX and we are now stalling below key resistance and volatility is dropping. If resistance holds and we break the bottom of the channel we expect a move down to support indicated and would swing trade short.
SP Greed
Keep in Mind Markets DONT Crash on Fear
Sentiment D Bank
“The S&P500 has essentially remained within its 3 month range despite two huge positive catalysts in the form of the resolution of US election uncertainty and the vaccine announcement, which has strong forward looking implications, while selling off on widely anticipated pandemic restrictions and disappointments on fiscal stimulus. This asymmetric market response suggests that positioning is now extended. Several quantitative indicators for positioning and flows reinforce this read.” (DEUTSCHE BANK)
SP Valuations
Crescat´s fundamental model for US equities going back to 1900. 15 valuation factors for US equities. 11 of them are undisputedly at record levels. The other 4, also near all-time highs.
Options Gamma
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