Yesterday, US stocks jumped the most since Friday, when unemployment fell to the lowest in 18 years, even as wage growth was muted. The combination of a more efficient workforce at a proportionately lower wage painted a picture of a Goldilocks economy – not too hot and not too cold, but just right (and more importantly, sustainable).
One would think that US equities should have responded negatively due to two events that are currently unfolding. The first is rising Mideast risk after US President Donald Trump scrapped the Iran nuclear deal on Tuesday. The second is the outlook for higher rates as 10-year yields climbed back above the 3 percent key level once again yesterday. Still, despite these two potential catalysts, stocks just keep moving higher.
If US equity investors had chosen to simply disregard geopolitics, we'd chalk that up the continuation of a recent pattern: since the mid-2016 Brexit vote surprise, markets have simply continued climbing no matter the expected outcome of global events. However, when traders disregard the trigger for the first double-digit correction since February 2016—the highest 10-year yield since 2014 and the highest 2-year yield since 2008—we have to chalk that up to pure greed.
And sometimes, in the unforgiving financial market battlefield, pigs can get slaughtered.
While 10-year yields closed under 3 percent and are extending that retreat today, down to 2.98 percent, this is occurring after the completion of a bullish falling flag, implying a spike, for possibly a second time, after the 20 basis points jump in mid-to-late April, eyeing the 3.14 percent level.
The price of the S&P 500 is approaching the top of a symmetrical or descending triangle, depending on whether one includes the intraday lows of February and April, and this is a debate among technicians. It is also approaching the 100 DMA. Except for a short stint above it on April 17 and 18, it has been trapped below its resistance since falling below it on March 22. We believe this dual technical resistance may join the screamingly obvious geopolitical and higher-rate risks to push prices back down.
On the other hand, a decisive upside breakout would flip the market dynamics and signal higher rallies. Should this happen, it would finally take on the January record.
Trading Strategies
Conservative traders would wait for a decisive breakout of the triangle.
Moderate traders may short when confirming the resistance at the triangle top, with at least one long red candle engulfing the preceding green candle.
Aggressive traders may short now, with a stop-loss above the 2,710 triangle top and a minimum target of the 200 DMA, at 2,619, with a second target at the 2,850 triangle bottom.