How to Trade the US S&P Global Services PMI Flash: A Comprehensive Guide
Introduction
We just have a quick question here from Paul asking whether we have a specific template that we use for the pivot points. Now Paul, not really, it’s just a standard pivot point. Let me show you which one it is.
Understanding the US S&P Global Services PMI Flash
The S&P Global Services PMI Flash, released monthly by S&P Global, measures the activity level of purchasing managers in the service sector. While it doesn’t provide the immediacy of some real-time data, it offers a timely snapshot of the health of the service industry.
Why S&P Global Services PMI Flash Matters
- Economic Indicator: The S&P Global Services PMI Flash is a crucial economic indicator as it reflects business conditions in the service sector, which constitutes a significant part of the US economy. It offers timely insights into business activity, new orders, employment trends, and price pressures within the service sector, helping traders understand the current state and future direction of economic growth.
- Influencing Policy: This report can influence the Federal Reserve's decisions, especially when it highlights trends in economic activity. The Fed monitors various economic indicators, including the PMI Flash, to gauge the health of the economy and make informed decisions about monetary policy. If the PMI Flash indicates significant changes in the service sector's performance, it could impact the Fed's stance on interest rates and other monetary measures.
- Business Confidence: The PMI Flash reflects the sentiment and confidence of purchasing managers in the service sector. A higher PMI reading suggests increased business confidence and economic expansion, while a lower reading indicates contraction and potential economic slowdown. This information is valuable for traders as it provides insights into the business cycle and potential market trends.
- Complementary Data: The S&P Global Services PMI Flash adds context and depth to major reports like the jobs report and inflation numbers, helping traders form a more complete picture of economic conditions. By analyzing the PMI Flash alongside other key economic indicators, traders can develop a more comprehensive understanding of the economy's overall health and make more informed trading decisions.
- Supply Chain Insights: The PMI Flash also provides valuable insights into supply chain dynamics. It highlights issues such as supply shortages, delivery delays, and inventory levels, which can impact production and service delivery. Understanding these supply chain trends can help traders anticipate potential disruptions and market reactions.
Why S&P Global Services PMI Flash Matters
- Short-term Data: The PMI Flash provides a quick look at current trends, but it may not have the depth of other reports. While it offers timely insights into the service sector's performance, it is based on surveys and represents a snapshot of the current month, which can be subject to short-term fluctuations and may not fully capture longer-term economic trends.
- Tier 2 Status: It’s not as prominent as high-impact reports like the Non-Farm Payrolls (NFP) or Consumer Price Index (CPI), so it usually doesn’t create significant market waves. Traders often prioritize these more influential economic indicators over the PMI Flash, leading to relatively muted market reactions.
- Market Expectations: The market may already have priced in expectations based on other economic data and forecasts. If the PMI Flash comes in line with or close to expectations, it might not cause significant market movements. Significant deviations from expectations are required to generate notable market reactions.
- Frequency and Volatility: The PMI Flash is released more frequently (monthly) compared to quarterly reports like GDP, which means its impact can be diluted over time. Additionally, the service sector, while important, may not exhibit the same level of volatility as other sectors like manufacturing, which can limit the immediate market impact of the PMI Flash report.
- Complementary Role: The PMI Flash often serves as a complementary data point rather than a primary market mover. It adds valuable context to the broader economic picture but may not have the same standalone impact as other major economic indicators. Traders use it in conjunction with other data to refine their trading strategies rather than relying solely on the PMI Flash for decision-making.
- Lagging Revisions: Initial PMI Flash readings can be subject to revisions in subsequent releases. These revisions can alter the initial market interpretation of the data. Traders may be cautious in reacting strongly to the initial release, knowing that revisions could change the overall assessment of the service sector's performance.
Trading Strategy for S&P Global Services PMI Flash
Step 1: Analyze Federal Reserve Priorities
The first step is to understand what data points the Federal Reserve is currently focused on. If the Fed is focused on this piece of data, then the data point will have a significant amount of volatility because the Fed is in some way basing its interest rate decisions on that data release. To quickly determine the Fed’s current focus, you can use our Professional Economic Calendar, which includes a fundamental guide. This resource helps traders stay updated on the data points that matter most to the Fed, providing a strategic advantage.
Step 2: Use High-Low Expectation Forecasts
Professional traders rely on high-low forecasts to gauge market expectations accurately. Here’s a more detailed look at why these forecasts are crucial:
Understanding High-Low Forecasts
Economic forecasts are derived from surveys of credible institutions, each providing their best estimate on upcoming data points. Retail calendars typically present the median of these estimates, which can be misleading. The median forecast doesn’t reveal the full range of expectations and, therefore, doesn’t indicate how surprising an actual data release is compared to the extremes of analysts’ projections. In contrast, professional economic calendars include both high and low estimates. This additional information shows the analysts’ expectations at the extreme ends of their projections. Great trading opportunities arise when data releases fall outside these high and low estimates, creating market shocks that move prices significantly.
Step 3 - Choosing the Most Volatile Instrument to Trade
Using insights from institutional reports, traders can select the most responsive currency pairs. For example, if USD/JPY is particularly sensitive to economic data as outlined by the City Economic Surprise Index and the PMI Flash shows a significant deviation, this pair could be an ideal target for trading.
- City Economic Surprise Index: This report identifies currency pairs that react strongly to economic surprises. It highlights pairs that are sensitive to data deviations, helping traders focus on the most responsive markets.
- Risk-Reversal Report: This report shows market positioning, revealing a buildup of call or put options on certain currency pairs. Understanding these positions helps traders choose a pair that may have orders susceptible to getting liquidated upon the release of an economic data point.
- CFTC Report: This report details hedge funds' positions; if a lot of big players are long the EUR/USD but then data comes out in favor of the USD, some of those funds might have to unwind their positions leading to an outsized move. Good thing you didn’t trade the GBP/USD.
Trade Execution Steps
- Confirm Fed Focus: Ensure the Federal Reserve is currently emphasizing employment data. If employment is a primary focus, the PMI Flash report will have a higher likelihood of moving the market. Remember, if the central bank is focused on the data point, it’s because they are using that data point to make a decision on rates. This is the reason data points that are focused on cause volatility.
- Check Forecast Ranges: Before the data release, review the high and low forecast expectations for the event. Plan to trade only if the actual data significantly exceeds the high estimate or falls below the low estimate. This strategy ensures you act on genuinely surprising data and there will most likely be a follow-through reaction.
- Monitor Revisions: Check for any conflicting revisions in the data, as these can alter the initial market reaction. Make sure the primary release and any revisions align to support your trade.
- Enter Trade Promptly: Once you confirm the deviation, act quickly to enter your trade. Enter within the first 30 seconds. Speed is crucial, as market reactions to significant data surprises happen rapidly.
- Set Stop and Take Profit:
- Stop-Loss: Place your stop-loss below the low of the initial spike candle to protect against adverse movements.
- Take Profit: Aim for 15-30 pips for tier 2 events like PMI Flash, adjusting based on market conditions and volatility.
Understanding High-Low Forecasts
- After the Initial Run: Look for a shallow pullback around a 23% Fibonacci retracement or near support/resistance levels. This initial pullback can provide an opportunity to enter the trade again after you’ve taken a few points off the table after your first entry.
- Break Even: Move your stop-loss to break even as soon as possible to protect your gains. The stronger the release, the shallower the pullback. Moving to break even is essential because the market should want to buy off your S&R level and continue to the highs of the one-minute candle and break. If that doesn’t happen, something could be off.
- Reentries: If your initial position is stopped out at break even, consider reentering at deeper retracements, such as the 38% or 50% Fibonacci levels. Use nearby support and resistance levels to guide your reentry points.
Conclusion
While the US S&P Global Services PMI Flash report may not always lead to significant market movements, understanding its nuances and using a professional trading strategy can help you capitalize on unexpected deviations. If you don’t have the tools mentioned above, try out our Professional Economic Calendar Package and use institutional tools to level the playing field. By following these steps, you’ll be well-prepared to trade the PMI Flash report effectively, leveraging the same strategies that professional traders use to profit from this economic data release.