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The outlook for the SP500 and EURUSD

After returning from a two-week trip to Asia yesterday, today marks my first day back in the Sydney office for 2019. I wonder if I could have picked a more crucial time to return, with both U.S. equities and in FX with the EURUSD, testing some very interesting chart levels.

Firstly to U.S. equities which edged higher overnight for the 5th day in a row, buoyed by U.S. – China trade talks, and another round of dovish Central Bank speak as Federal Reserve Chair Powell who spoke at the Economic Club in DC overnight, stressed the Federal Reserve could be patient in raising rates as inflation prices remain muted.

Just the latest in a string of dovish Fed communique in recent weeks, that has resulted in several large banks who were previously calling for 4 quarterly interest rate hikes in 2019, now calling just one, perhaps two, hikes at most. The market remains sceptical of the likelihood of any hikes with little priced for 2019 and 15bps of interest rate cuts priced for 2020.

There is little doubt equity markets have embraced the Fed’s new dovish tone to the point where S&P500 futures have rallied almost 12% from their lows and are now testing a band of resistance between 2600 and 2625. 2600 was of course the point which once broken on a closing basis in Mid-December, saw the down move accelerate towards the 2316.75 low. Hence, it’s very much a “scene of the crime” type level etched into “Mr Markets” memory and one that I doubt will be bypassed quickly or easily.

For those that were able to get on board the recent rally in the S&P500 (or waiting for a bounce to sell to reduce exposure) price is now pushing into a resistance area where I would consider locking in some profits, for the following reason. Should the S&P500 reject the band of resistance 2600/2625 in coming sessions, technically it would set up a retest of the December lows, with scope to push towards 2200. Hence rejection from 2600/2625 would imply better buying levels will be forthcoming in 2019, as well as a possible shorting opportunity for aggressive traders.

Conversely, should the S&P500 rally continue to extend and close above the top of 2600/2625 resistance band (let’s say 2650 to give the volatile markets extra room) it would greatly increase the probabilities that the September-December decline has been a corrective pullback within our Elliott Wave framework. This would project a possible retest of the September 2947 high and as such a daily close above 2650 would be viewed as a nice trigger to rebuild longs.

The outlook for the SP500 and EURUSD

Turning to FX, the EURUSD after many months or lacklustre price action, has finally broken out of the top of a 1.1200-1.1500 type range, trading to an overnight high of 1.1570. The range break was prompted by the more dovish Fed tones mentioned above, as well as two other factors including USDCNY breaking below strong support at 6.8000 as well as increasing signs that a no-deal Brexit is less likely, therefore keeping EURUSD and GBPUSD supported on dips.

Technically, I feel the EURUSD rally can extend towards 1.1625 and then 1.1850 in coming weeks and as such I favor buying dip type strategy in the EURUSD in coming sessions. I will stay with the bullish bias providing the EURUSD does not retrace too heavily back into the range i.e. below 1.1450.

The outlook for the SP500 and EURUSD

Source Tradingview. The figures stated are as of the 11th of January 2019.  Past performance is not a reliable indicator of future performance.  This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

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