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Get Ready for the Bear Market

Last week’s selloff was brutal for investors in the US stock market: the Dow Jones Industrial Average closed at its lowest level since late 2020, falling to 29590.41, losing 1.6% on Friday alone. With the S&P 500 currently down a whopping 23% from January’s highs this year, and other indexes close behind percentagewise, stock market bulls are understandably desperate to find any event to warrant optimism. Unfortunately, despite some respite from US inflation in July and August, there does not appear to be much reason to expect this selloff to stop anytime soon. With bearish momentum emerging for equities, and fears about an impending crash and recession growing, we have no choice but to get ready for the bear market.

What is a Bear Market?

Technically speaking, there is no strict definition for a bear market, since it is a more colloquial term than an exact set of financial conditions. However, it is generally agreed upon that when analysts refer to a bear market, they are discussing a financial market or index that has lost at least 20% of its value from recent highs. It is also worth noting that a bear market can occur without that market crashing, since a crash often refers to a dire situation in which said market loses at least 10% of its value in a single day.

Why is This Happening?

Many factors can contribute to a bear market, ranging from trade and foreign policy issues, to market-generated financial crises, to fiscal and monetary policy. In this particular situation, there appear to be two interrelated key catalysts creating a looming bear market in the United States:

1) An extremely hawkish Federal Reserve that is in eager pursuit of contractionary monetary policy, with economic growth being sacrificed accordingly. Chair Powell recently emphasized this at the FOMC press conference by explaining that for now, the Fed can only fulfill its ‘dual mandate’ by focusing on stabilizing prices at the expense of high employment, for the sake of eventual maximum employment. Stocks are not just a casualty in the effort to reduce high prices, they are a primary target.

2) Poor economic forecasts for both businesses and consumers, tied together in a vicious cycle. High interest rates will make it difficult for businesses to borrow or attract investors, as their high-risk shares and bonds will be far less lucrative compared to low-risk alternative securities. This nearly guarantees that they will have less capital to spend on employees, reducing employment opportunities and triggering layoffs for workers who are already struggling under the weight of high inflation and costly debts. These workers will then likewise spend even less, guaranteeing lower revenues for businesses accordingly, further impeding growth.

How Severe Will It Be?

For better or for worse, because of how unpredictable markets are by nature, we are effectively unable to know just how severe this bear market and recession could be. However, between the Federal Reserve’s far-from-spotless track record (2022’s hawkish Powell is, in fact, still the same person as 2021’s dovish optimist who dismissed inflation as ‘transient’), as well as the inherent lags in inflationary data such as Core CPI, the Federal Reserve could easily overshoot their tightening effort and create a depression.

This seems especially possible considering how badly the stock market has been hit while the labor market remains hot; these selloffs may become far worse as unemployment rates begin to increase, particularly if high global food and energy prices remain a problem for US consumers. However, because this hawkish monetary policy mission is consciously created by the Fed, rather than being the result of a structural failure as per the Financial Crisis of 2008, there is a chance that a meaningful economic recovery could be implemented more quickly than in decades past.

What Can Be Done?

Sadly, little can be done by working people to prevent a bear market from occurring beyond a miraculous, coordinated effort to voluntarily reduce consumer spending across the United States. Even if volatile food and energy prices continue to fall in a similar fashion as over the last few months, the Fed would still likely keep their eye on core inflation for a more complete picture. This downturn is being induced at an institutional level and is ostensibly unavoidable.

Nonetheless, for those who are long-term investors, bear markets also present myriad buying opportunities, as many shares across sectors are available at heavily discounted prices. For those who are patient and have some income to spare, building a diversified portfolio through recurring investments in safe, reputable funds remains a simple way to capitalize on poorly performing indices. While these methods by no means cancel out the horrors of economic suffering, value investing in this fashion offers consumers some semblance of wealth-building agency as we endure this business cycle.

Key Takeaways

• There have been significant declines in stock market prices since January of this year, with some indices, like the S&P 500, losing over 20% of their value. These trends sadly don’t appear to be stopping.
• A bear market is a term typically used in the context of a financial market or index that has lost at least 20% of its value from recent highs.
• While bear markets can occur for numerous reasons, the primary catalysts behind an impending bear market in the US appear to be hawkish aggression from the Federal Reserve and a bleak outlook for businesses, workers, and consumers accordingly.
• Although the exact dimensions of an anticipated bear market are unpredictable, it seems plausible that its severity could exceed that of current FOMC economic projections, though perhaps last more briefly because it is only artificially induced by the Fed.
• Unfortunately for working people, little will likely be done to prevent this downturn from happening at an institutional level. However, for those who can set aside some money for recurring and diversified long-term investments, buying opportunities will be plentiful.

Get Ready: Big 3 Tomorrow

On September 2nd, tomorrow morning, at 8:30 am Eastern Time, the Bureau of Labor Statistics is scheduled to release another crucial round of US labor market data for last month. The public will learn 1) how average hourly earnings, i.e., labor prices, have changed month-over-month, 2) how many non-farm payrolls (NFP) were added, and 3) what the new national unemployment rate is. These three bits of information will likely cause a great deal of volatility among major pairs.

How Is This Significant?

These metrics offer traders key insight into how hot the US labor market still is, which plays into overall inflation because of its reciprocal relationship with consumer demand. If these numbers beat market forecasts, then the Federal Reserve will be even more incentivized to hike the federal funds rate to slow the economy, which is bullish for USD. However, if the data fail to meet forecasts, this would be bearish for USD accordingly. Current expectations are: 1) average hourly earnings to increase by 0.4%, 2) 295,000 net new hires across non-farm industries, and 3) a static unemployment rate, remaining at 3.5%.

Possible Pairs to Trade

According to the EdgeFinder, A1 Trading’s market scanner that offers supplemental analysis for traders, the following are currently three of the most promising major pairs to trade for USD bulls. Whether you plan on entering a position before tomorrow’s big news, or wait until the data is revealed, these three pairs are worth watching.

1) EUR/USD (Earns a -7, or ‘Strong Sell’ Rating)

Get Ready: Big 3 Tomorrow

2) GBP/USD (Earns a -7, or ‘Strong Sell’ Rating)

Get Ready: Big 3 Tomorrow

3) USD/JPY (Earns a 4, or ‘Buy’ Rating)

Get Ready: Big 3 Tomorrow
Warning: Jackson Hole is Here

The next few days will likely be full of unusual degrees of volatility in both the forex and stock markets. Let’s discuss why, and how to prepare for it, as we issue an urgent warning: Jackson Hole is here.

What is Jackson Hole?

The Jackson Hole Economic Symposium, often simply referred to as ‘Jackson Hole’, is an exclusive, three-day annual conference sponsored by the Federal Reserve Bank of Kansas City. Held in Jackson Hole, Wyoming since the early 80s, the conference is an extremely significant event for traders and investors, as it is attended by many of the biggest movers and shakers in the global financial markets. Invites are reserved for influential investors, prominent government officials, economists, and central bankers, and media coverage of comments and speeches at the event can heavily influence market sentiment and price action.  

Potential Impact on Major Pairs

Jackson Hole is an extremely difficult event to prepare for because coverage is extensive, and any number of off-hand remarks could have dizzying unexpected consequences. With the conference kicking off today, traders should take caution since the forex and stock markets could easily become the wild west over the next few days, with any number of catalysts surfacing.

Tomorrow at 10 am Eastern Time, Fed Chair Jerome Powell is set to give a Symposium speech on economic outlook which will likely address the dual problems of inflation and recession, wherein he will offer hints at Fed policy plans. Depending on whether his remarks are interpreted as hawkish or dovish, this could potentially cause USD to either plummet or soar against other currencies. With a smaller Q2 US GDP contraction than originally estimated, and Core PCE Price Index (the Fed’s preferred measure of inflation) numbers also coming out tomorrow at 8:30 am, traders, Powell, and conference attendees will all have much to chew on.

Possible USD Setups

According to the EdgeFinder, A1 Trading’s market scanner tool that helps traders conduct analysis, here are three of the top-rated pairs to sell for USD bulls. All three have recently hit key support zones, though no breakouts from their clear downtrends have yet to occur. If Powell comes across as particularly hawkish tomorrow, this could prompt breakouts to the downside, and continuation for the existing downtrends. However, if he comes across as dovish, we may see support hold, along with breakouts to the upside, disrupting these downtrends.

1) GBP/USD

Warning: Jackson Hole is Here

2) EUR/USD

Warning: Jackson Hole is Here

3) AUD/USD

Warning: Jackson Hole is Here

Gold has been struggling to move higher before a selloff takes the metal back down to the lows. One of the problems is coming from COT which is suggesting a decrease in long contracts. However, price is still moving upward towards yet another test at a key level. Here are a few catalysts that could eventually push gold back to the $1900s.

Higher Inflation

Inflation is a major factor in the behavior of the stock market, USD and gold. Annual inflation rate jumped to 7% which is a multi-decade high, but gold is still struggling to move higher. This is likely because investors are already expecting a higher interest rate in March, but such a high jump in inflation cannot be quelled from a single hike of 25 bp from the Fed.

gold

Wedge Breakout Pattern

Another potential catalyst is caused by the technical pattern setting up on the 1D chart. Gold has been stuck in a long term wedge for over a year, but recent activity suggests a breakout to the upside.

Here is gold on the 1D timeframe. Movement to the top of the wedge has become more frequent meaning buyers are testing the level more and seeing if they can catch a breakout. This is important to note since gold is coming back up to make another test on this level. If we do see a break, I think we could watch gold go all the way to the $1900s level again. However, I am mixed about a long-term uptrend in gold's price after hearing the very hawkish Fed statements going all the way through 2024.

Bitcoin finally popped on consumer demand after we discussed a potential surge last week in this article. This seems like a crypto-led rally since tech stocks are not causing a spike in the market overall. COT doesn't even suggest a big money shift into the crypto industry, so this move must be a retail rally.

How To Trade The Bitcoin Surge

The problem we face as the smaller investor always comes down to FOMO or hesitation. When we see the price of an asset spike, we either come to one or two conclusions: we hop in or we stay on the side lines. Both decisions can lead to good or bad consequences, so it is never an easy choice. However, that is when the smart investor will starts evaluating the possibilities.

Bitcoin
Bitcoin broke above the $40K psych level and is not testing resistance in the $43Ks. A big bullish indicator would occur if the pair could close above the 50 DMA today. This would suggest a higher move above resistance and another test at the 200 DMA.

If you are still not holding any BTC but want to get in, then you could consider what's going on in other markets. For example, the dollar (DXY) is down today after losing just over 2% from the highs last week suggesting that the USD is hurting from inflationary pressures.

Mixed earnings is also causing some uncertainty in the equities market, and investors are unsure of where to put their money. Crypto has been in a downtrend for months that were initially sparked by regulatory concerns late last year. The crypto market tends to go in and out of these cycles making them the perfect choice for profitability one month and an account-blower the next.

Additionally, we know the momentous moves bitcoin and other altcoins can make. So, a pop like this might be an indication that this is where investors are putting their money. This means that the gains on BTC so far could be just the beginning.

Other Altcoins To Watch

Bitcoin
ETHUSD also looks promising on the 1D chart after coming above resistance and nearing the 50 DMA. It's the same idea as Bitcoin: if we can see a close above current resistance, we will likely see a move higher to the 200 DMA.
Bitcoin
ADAUSD is bouncing up over the wedge on the 1D chart and nearing the 50 DMA as well. Due to the recent crypto surge, we could see Cardano coming to the top of the wedge. The downtrend suggests that momentum probably isn't that strong to the upside, but a move higher to the top of the wedge seems likely.

Mixed jobs data in the US has caused major uncertainty in the stock market which could be beneficial to BTC (Bitcoin) overall. BTC/USD is up nearly 8% on the day at the time of writing this, while the SPX500 is down a little over 1%.

Mixed Market Data

Although NFP showed us an additional 467K jobs this month, we still saw a rise in the unemployment rate. This caused some uncertainty in the equities markets as well as a spike in crypto. This uncertainty has driven investors away from riskier bets on Wall Street due to high levels of volatility.

BTC
US NFP from the past 7 months

A mixed earnings season has also caused investors to worry as major tech stocks miss but still see incredible upside in after-hours trading. Amazon got downgraded and missed earnings, but the stock saw over a 10% spike in price during post market.

The recent tech rally could be helping bitcoin's price as well since the majority of them use or plan to use crypto in their business model over time. There is a chance that this rally could fade due to the fact that there was an unjust surge in tech stocks coupled with mounting USD demand. However, when crypto catches momentum, it rides that wave for a while and for a long time. So, this spike could be the beginning of a larger rally to come.

BTC/USD

BTC
BTCUSD spiked today on a US jobs number miss and is now testing a significant resistance level around $39,700s. If we see a break above, the next stop could be at the 50 DMA. The death cross at the beginning of the year is still concerning, but we could be seeing a momentum shift in the short term.

Breaking the $40K mark was a significant step for the crypto, although it is still uncertain how much farther the coin will rise. I think the momentum going into today's session is a good sign that we could see a couple more like this at least. One key indicator to look for is if BTC can close in the $40,000s to prove that it has broken resistance.

Today, the European Central Bank announced that they will be keeping their rates the same at -0.50%. This dovish statement is raising some eyebrows as investors look at the inflation index hitting a higher number since the 90s. The recent rise could be an indication that sellers are getting ready to short euro.

Reasons To Short Euro

Other than inflation rates, President Lagarde gave a bearish outlook on the economy of the Euro-area as a whole. Lagarde said that Europe is simply not ready for higher interest rates. This means that these countries have a long way to go recovery-wise. It also means that they can't even consider catching up with other countries who are already taking these measures.

short euro

Additionally, ECB has interest rates set to -0.50%, meaning that you will get paid to borrow a loan or keep your money in a bank, but purchasing the euro will not yield you any money. And the euro's value will keep depreciating with inflation rising. Overall, this looks less attractive to other interest-yielding currencies like USD or GBP.

Short Setups

short euro
EURAUD is shooting up towards the top of a wedge on the 1D chart. Price could retrace from this level and come back down to support around the 200 and 50 DMAs.
short euro
EURGBP is up 0.65% on the day despite the ECB deciding to keep their short term interest rate the same while BOE has risen theirs to 0.50 from 0.25 bp. On the 1D chart, price is nearing a short term high and the 50 DMA.

Lastly, today's rise in the euro seems like a short setup to me. There isn't much reason to be bullish on this currency when you compare it to other governments' monetary policies. Record inflation and negative interest rates is not a good look for the euro. And I think that we will start to see further declines in the currency in the future.

AUD pairs are drifting higher today in anticipation of Governor Lowe speaking about economic outlook and bank policy going forward. Aussie pairs are running as high as 1.20% at the time of writing this (AUDJPY).

AUD Forecast This Week

The buck looks like it will remain in bullish favor up until Thursday's RBA statement. Investors are expecting a clearer picture on the bank's monetary policy after Thursday as well as some hopeful statements regarding rising annual GDP growth rate.

AUD
https://tradingeconomics.com/australia/gdp-growth-annual

Australia saw the largest growth in GDP in Q2 of 2021 and slowed down in the third quarter, but GDP beat expectations in both quarters. We won't see Q4's numbers until March 2. And the low forecast leads me to believe that we could see another beat in expectations although the annual GDP growth rate has slowed considerably.

Another factor to consider is that a recovering economy could then lead to higher interest rates, according to an FXStreet article. If we take into account the possibility of higher rates in the latter half of this year, then we have to consider the possibility of investors pricing in a higher value in the buck. Lowe will probably cover that topic in depth during the meeting this Thursday.

Pairs that will probably do the best with this news would be AUD/JPY, EUR/AUD, and AUD/NZD.

AUD Pair Setups

AUD
AJ forms a double bottom support level and bounces up towards the 50 and 200 DMAs. A falling trend line on the 1D chart looks like the next major level of resistance. Additional support lies below around 78.788.
AUD
EUR/AUD could find resistance at the falling trend line on this timeframe and revert back to the moving averages or the lows of 2022. 1.57205 seems like another level of support for price to come down to should the pair fall under the 200 DMA.
AUD
AUDNZD is coming up towards June highs of 2021 after a huge momentum shift on the pair. A golden cross opportunity also marks bullish favor as sentiment around the buck is getting more bullish. Support lies below around 1.06497.

Aussie pairs are heavily volatile today according to the heat map that suggests a bearish trend for the currency. Other than technical indicators, there are a few reasons as to why AUD is bearish now.

Lower Gold Prices

Investors now have a risk-aversive attitude towards the forex market and equities markets as they shift from Aussie to USD. Money is now being moved from the gold-heavy Australian economy to the "safe-haven" USD which will likely see higher interest yields in the coming months. WTI spot is up 1.20% and gold is down 0.78% on the day at the time of writing this.

Hawkish Fed

A hawkish Fed statement has brought a lot of demand towards the USD, and in turn has been hurting currencies who's countries are slower to the tighter monetary policy phase. Risk-off behavior has taken over the forex market as analysts are now expecting a rate hike by 125 basis points in this year alone, according to an FXStreet article.

This means that we could see a total of five individual hikes of 25 bp throughout the span of a year. If this expectation turns out to be true, Aussie would likely be bearish for a while.

AUD/USD

aud is bearish now
AU touches lower under support on the 1D chart as the sell off continues. Price is right on the support level now, but a lower low suggests a move lower to the 0.69200s.

With nearly zero moves towards tightening monetary policy, Japan's currency stands almost no chance against the major pairs like GBP, USD, EUR, CAD and AUD. Here are some reasons and setups behind why shorting the yen could be beneficial in your trading.

High Debt-To-GDP

If you were to look at the amount of accumulated debt in 2020, you would see an extremely high increase in the amount of debt Japan took on paired with their stagnant and somewhat dwindling GDP over the span of a year.

shorting the yen
https://tradingeconomics.com/japan/government-debt-to-gdp

Japan also has a negative growth outlook GDP-wise. We are probably not going to see much improvement in the economy or in the currency in 2022. And even if Japan decides to switch gears at some point this year and tighten policy, the others have already had a head start. Interest rates are incredibly important in the world of forex, and the fact that other countries are taking that initiative before Japan is a big indicator for yen-shorters.

Best Pairs For Shorting The Yen

shorting the yen
GBPJPY could be a promising pair to long if price can break above a falling trend line on the 4H chart. Further resistance lies above around 155.420s should the pair close above this level and break out.
shorting the yen
USDJPY looks very bullish even as it tests resistance on the 1D and 4H charts. It looks like the pair wants to break above this level and test the top of this channel around the 116-116.900s.
CADJPY looks somewhat bullish on the 1D chart as the pair is stuck between support and resistance levels. The 50 and 200 DMAs lies below the price which suggest a bullish trend bias for the pair. If CJ can close above the 91.159 mark, we could see a further move higher to the 92.200s.

For more forex analysis on other pairs, click here.

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