WTI the SP500 and CADJPY

U.S equity markets etched out further gains overnight after President Trump confirmed that the “US has made substantial progress” in its talks with China, and “I will be delaying the US increase in tariffs now scheduled for March 1”. After clearing this initial hurdle, the scene is now set for a trade deal to be formalised, most likely at a “signing summit” attended by President Trump and President Xi in mid-March. Always quick to claim credit for an equity market rally, President Trump tweeted, “since my election as President, the Dow Jones is up 43% and the NASDAQ Composite almost 50%.”

After the strong rally of 2019, there is now a possibility that the U.S. equity market (and President Trump) has boxed itself into a classic “buy the rumour, sell the fact” type reaction which I will cover in more detail shortly. Before I do, I would like to quickly turn our reader’s attention to crude oil, another market that President Trump continues to pay close attention to.

Overnight, West Texas Intermediate crude oil futures fell -2.5% to $55.43/bbl after President Trump tweeted about the price of crude oil. “Oil prices getting too high. OPEC, please relax and take it easy. World cannot take a price hike - fragile!". What does crude oil have to do with the price of equities and the possibility of a “buy the rumour, sell the fact” type reaction I hear you ask?

Keen observers will have noticed, that the recent rally in S&P500 and crude oil both started on the same date, the 26th of December 2018. Since that point, crude oil has rallied over 35% while the S&P500 has rallied over 20%. The advance of both markets sharing a similar type of structure, buoyed by the Feds progressive move to a more dovish stance and the prospects of the China-U.S. trade deal outlined above.

Drilling down a little deeper, last Friday crude oil completed a potential reversal candle, just 24 hours before its 2.5% fall. Exactly, the same type of reversal candle formed in the S&P500 overnight as highlighted on the chart below. Is the fall in crude oil, preceded by a similar candle formation warning of a similar move in the S&P500?  

While the intermarket analysis is supportive of this idea, so too is our conventional analysis. In recent articles, we have warned about the possibility of pullback from the 2815/25 resistance area and overnight the S&P500 traded to a high of 2814. Should the S&P500 now break below near-term support at 2865, it would be further confirmation that a pullback towards 2680 is underway.

As I am predominantly an FX trader, I have turned to CADJPY shorts as my preferred vehicle to position for possible falls in in both crude oil and equities. As can be viewed on the chart below, CADJPY formed a potential reversal candle overnight, right on the 50% Fibonacci retracement at 84.45, of the decline from the 89.22 October 2018 high to the pre-flash crash January low at 76.65.

The first support zone in CADJPY is the trendline support at 83.60, a break of which would then open up a move towards 82.80. Buy stops placed initially above 84.60 with a view to trailing the buy stop lower if the “buy the rumour, sell the fact” reaction plays out as anticipated.

Source Tradingview. The figures stated are as of the 26th of February 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