In this article “Why CADJPY is worth a look” we spoke about the shift that occurred midway through last week as a series of unrelated events combined to remove tail risks and prompt a relief rally in risky assets.
One market to rally strongly was the S&P 500 which closed above 2976, resulting in a more neutral stance. Already though, I am finding both the fundamental and the technical picture challenging my neutrality.
Firstly, to the fundamentals. The U.S. manufacturing sector is continuing to slow as witnessed by last week’s ISM manufacturing PMI which fell into contractionary territory for the first time since January 2016. Offsetting manufacturing weakness, the U.S. consumer has remained solid, underpinned by a strong labour market.
However, challenges to the strong consumer story are becoming more frequent. Last week the sharp drop in the August University of Michigan consumer sentiment survey was highlighted. Then followed, Friday’s U.S. jobs report where the details were less impressive than the very low 3.7% unemployment rate.
As Morgan Stanley & Co Chief Economist Chetan Ahya noted, payroll growth has fallen to an average of 141,000 jobs this year from 234,000 in 2018. Private payrolls increased by only 96,000 in August, a 3-month low and Julys numbers were revised lower. In short, enough reasons to think that conditions in the labour market may have peaked and the possible impact on the consumer.
Turning to the charts, the daily Doji candle that formed overnight in the S&P 500, warns of loss of upside momentum and creates the set up for a short S&P 500 trade. Should the S&P 500 now trade 5 points below the lows of the overnight Doji candle (without breaking above 2995 first) it would be a bearish development and a reason to consider initiating a S&P 500 short trade.
If the S&P 500 were then to break and close below the August highs 2940/30 area, it would provide another layer of bearish confirmation and warn that Wave iii or c low has commenced targeting a retest and break of the August 2775 low. Buy stops should be placed above 3000 and the stop trailed lower should the market move lower as anticipated.
Source Tradingview. The figures stated are as of the 5th of September 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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