FBS News: Top Trade Opportunities: Short the S&P 500 and Long the AUDUSD

Several high-level issues are fighting for investors' attention as we enter the second quarter of 2022. The resilience of broad risk trends, a decidedly hawkish push from the world's main central banks, high inflation, and Russia's war on Ukraine all have a significant impact on global market bearings. There is the possibility for relief rallies in this mix – such as the conclusion of the conflict on the Eastern European front – but how many possibilities provide an earnest positive market that would enable a durable ascent in the S&P 500 to traverse a sustainable push to progressive record highs？ I gladly acknowledge that markets may diverge from what I consider 'rationale' for a long length of time, but a break from this index below 4,100 would be a good technical indicator. However, fundamentals are required to validate the Q1 broad negative trajectory.

S&P 500 CHART WITH 20-WEEK SMA (WEEKLY)

On the fundamental level, a break in the fog of war is a strong charge for a relief rally; nevertheless, given the current mix of headwinds, there seem to be few other issues that may flip the switch to utter euphoria. Growth estimates, which were inevitably leveling down after the post-pandemic, stimulus-fueled recovery, have been hampered further by inflation and prospects of considerably tighter policy in the future. Though most traders are ready to agree that the Fed and other central banks are moving away from the 'unlimited QE' or 'central bank put,' the disappearance of that safety net does not seem to be discounted at all in overall market positioning. This realization will come not just when interest rates climb in the coming months, but also when central banks begin 'quantitative tightening' in earnest. And, if the markets continue to fall while the Fed and others maintain their commitment to fighting inflation, complacency will give way to dread.

S&P 500 CHART OVERLAID WITH MAJOR CENTRAL BANKS' TOTAL STIMULUS (MONTHLY)

I hunt for market options with opposing outcomes on important events or topics. If speculative hunger grows in the next quarter, the list of clearly risk-sensitive indicators that appear tempting in technical and fundamental terms is quite limited. One pair I'm keeping an eye on until the end of the first quarter is one with a technically tight prediction for its underlying yield difference. AUDUSD has traditionally benefitted the Australian Dollar when risk appetite has been on the increase. If the broad speculative urge remains or grows, desire for classic carry trades will likely begin to acquire momentum from the 'regular suspects,' such as the Yen crosses, which rocketed in March. The forward yield difference on AUDUSD may be tiny, but it has a large historical potential.

AUDUSD CHART WITH 20 AND 50-WEEK SMAS (WEEKLY)

Technically, the AUDUSD has space to run up to the upper end of its current range at the start of the next quarter. There is significant technical overhead at 0.8000, which establishes trendline resistance that dates back to January 2015 (with three key points of test) and also coincides with the middle of the 2011 to 2011 historical range. As the '50 percent Fib' of the broader range, there is naturally ample room for bullish advance above that point. If we break above 0.8000, I'd consider it a confirmation of an inverted head-and-shoulders pattern and a new milestone for bullish momentum. Having said that, I'll be cautious of confirming such a big-picture change.

AUDUSD CHARTS (MONTHLY)