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Declining US Equities: Top Trading Opportunities – By ASC


I usually take a systematic approach to these top trading installments. With a heavy focus on FX I have found the right system for me. See, most of the time when I work with FX, I follow major pairs, such as EUR/USD or AUD/USD. In many cases, I am looking to hedge some element of risk while focusing my exposure in a calculated way. For top trades, I will often look at cross -pairs because the themes I have worked with in the majors can often filter to long -term opportunities in crosses. So like GBP/JPY, for example, from Q4 last year. I basically just want to play the strength trend in GBP against the expected weakness that I value for JPY and, instead of setting GBP/USD and USD/JPY separately, just cut the middleman and go right for GBP/JPY. My Top trades from this year’s Q1 were a lot easier, only the USD price increased as I saw fundamental and evolving technology collisions that were hard to ignore.

For this quarter, however, there is only one area I would like to see for top trades and that is equity weakness, particularly in the Nasdaq 100 and S&P 500.

I know that the fear of rate hikes seems to be too much played out. The Fed, after all, can choose how quickly to raise rates. And while this has been an issue in the past, they have erred in terms of caution and equity strength. And to this day, the stock still continues to trade strongly amid a number of worrying factors that market participants seem to simply ignore. And, in fact, this isn’t too different from 13 years ago, is it? Since the Global Financial Crash, it has felt like one crisis after another. It feels like there are a million reasons for stocks to decline however, declining prices have faced a continuing stream of frustration as equities have made a historic record over the past decade.

But, I will evoke one of the most dangerous phrases in the financial markets and something I rarely say, if ever: I feel this time is different.

What is different this time is the Fed. We haven’t had to worry about inflation since the 1970s, before my lifetime. And while the Fed was wary of QE shortly after the collapse of the banking sector behind housing in 2008, the lack of inflation allowed them to be very aggressive with policy. So much so that the market is having a hard time operating without it, even at a time of positive economic pressures, such as 2018.

But after Covid and armed with a lack of fear from using QE for a decade without too much direct negative impact, the Fed went very wild and didn’t start ruling it before it was too late. Inflation has risen and this is something the Fed is surprised even though they continue to say that inflation has been temporary over the past year. And now they have to play chase chase.

Just as the Fed has started raising interest rates in an effort to keep inflation at bay for 40 years, there is another big problem on the horizon and one that carries more inflation potential than the raw material surge stemming from Russia’s invasion of Ukraine. The global economy has become somewhat dependent on free trade and relatively open trade flows. That no longer exists, and adds a little contradiction that can cause more problems; such as Russia blocking ships carrying grain which posed a greater supply problem. From an economic point of view, it feels like we are already in Cold War 2.0 and the severance of trade ties is unlikely to bring much benefit to both sides. This could create a sharper trend for inflation.

And all of this really spells out one thing: The Fed put seems to be dead, or at least it feels dead until a thousand holders are removed from the S&P 500. And this, technically, will be the first time it has really happened in a way in such a way. since the global financial collapse. There have even been comments from Fed members about designing a ‘soft landing,’ which is as if they want the stock price to come down from the current valuation.

In short – inflation is out of control and we are on the verge of or, perhaps, already in the middle of an economic war with other nuclear powers on which the world depends on trade. This can lead to food shortages around the world which can put more pressure on the world’s least fortunate countries and peoples. This could lead to further conflicts, such as the Arab Spring that began in 2010. And the Fed, which has been heavily supportive through a number of economic problems over the past 13 years, lacks the ability to support markets in ways that everyone is used to. They need to climb and this will only increase the pressure.

Collectively, this indicates both the strength of the US Dollar and the weakness of equities. The strength of the USD is my top trade for Q1 2022 and I think the idea of ​​short equities could be more effective, it’s also a more challenging background; so I will use short stocks for my Q2 2022 Top Trades.

S&P 500

At this point the S&P 500 has retraced 23.6% of the pandemic trend. Theoretically, the index could decline to a 38.2% reversal for the same major movement while maintaining some long -term bullish qualities. The area is projected to around 3800, and by that time production from January highs will reach 20% of the number of market regions bear. This appears to be a reasonable support target for the pullback theme in the S&P 500.

S&P 500 Weekly Price Chart

Charts provided by James Stanley; S&P 500 on Tradingview

Nasdaq 100

The Nasdaq 100 has already made its way to ‘bear market territory’ despite the fast pace. The index traded below the -20% production mark for a short period of time in Q1 and that compared to the maximum production in the S&P 500 of -14.69%.

If the rate theme is going to drive a bigger correction, I still like the Nasdaq for its greater bearish potential than the S&P 500 and I think we could see bigger selling here.

The 50% marker of the epidemic measure is around 11,700 and this will be a total production of 30% of the all -time high set in January. And there is a larger zone of interest that is a little deeper, from around 10,501 to 10,750. This is going to be a 35% withdrawal from November’s highs and if we’re in the kind of actual correction of the theme, that looks like not an unreasonable support target at all, though something like that might take time little time to build so it probably won’t emerge until the second half of this year in a larger overall market correction.

Nasdaq 100 Weekly Price Chart

Declining US Equities: Top Trading Opportunities

Charts provided by James Stanley; Nasdaq 100 at Tradingview

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