Gold, S&P 500: Two trade ideas for a potential Fed interest rate pivot

• Benchmark US Treasury yields have fallen sharply over the past week
• Softer US economic data, risk aversion and shift in tone from the Fed suggest the highs for yields may have seen
• Gold and S&P 500 price action suggests some traders think the Fed is pivoting

Choppy price action points to possible turning point

Markets are choppy and reacting to lots of noise right now, making them difficult to trade on a short-term time horizon. You may have a trade that ticks all the boxes in terms of setup, but before you know you’ve been stopped out only to see the price return to where you entered. Just look at recent price action in gold and the S&P 500. Only weeks ago they looked like they were entering a death spiral yet they’re now suddenly bouncing hard.

The skittish price action can be frustrating for even seasoned professionals. But it’s not usual to see this during times of heightened uncertainty and often occurs ahead of major turning points for markets. We may have well seen one over the past week.

Highs for US Treasury yields may be in

When the history books are written, a notoriously volatile report on US job openings with a response rate of 30% may have marked the top for benchmark US 10-year Treasury yields last week, getting traders overly excited about the implications for the Fed.

In the days since we’ve weakness in US average hourly earnings, a spotty payrolls report despite an apparent boom in hiring, a serious conflict in the Middle East erupt while the Fed has suddenly, in coordinated fashion, started giving off strong signals that it may be close to pivoting when it comes to the future direction of interest rates.

It’s the latter that is driving sentiment right now with many traders all too aware that major Fed shifts can deliver powerful trends across a variety of asset classes.

However, we don’t have conclusive evidence yet that we’re reached a turning point. Choppiness is likely to prevail for a while, hinting it may be an opportune time to reduce position sizes and lengthen trading timeframes as we wait for the Fed to signal rate rises are over. Gold and S&P 500 are both candidates for such a potential trade given the view yields may have peaked for this cycle, putting in some bullish price action on the weekly charts over the past fortnight.

Gold bounces hard after brutal unwind

Looking at gold, it’s bounced strongly from support around $1810, printing a bullish hammer before going on with the move this week. RSI and MACD are yet to generate a bullish signal, in part reflecting the speed of the current rebound.

Gold is not tangoing with prior channel support with additional resistance located between $1885 and $1900. One potential trade idea would be to buy pullbacks towards $1850 targeting a move towards $1985, a level gold failed to break during numerous attempts earlier this year. A stop below $1810 would offer protection.

S&P 500 found buyers ahead of key support

The price action on the S&P 500 weekly is not too dissimilar to gold with the US benchmark index bouncing strongly last week, forming a bullish hammer as buyers swarmed to buy the channel break, likely emboldened by the proximity of 4200 support and 50-week MA. Should we see a pullback towards 4325, a long trade targeting resistance above 4600, with a stop around 4180, is a potential trade to consider.

Given how resilient the index has been during this very difficult macroeconomic period, even a modest improvement in the investment backdrop would only act to bolster the bullish price action. RSI is also signaling a possible break of downward momentum.

-- Written by David Scutt

Follow David on Twitter @scutty

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