As we expected [see: Dec 1 CIW] VIX broke back down below the channel line connecting its succession of higher lows dating back to July. The rise above was, indeed, a head fake.
Taking all the above into account, I’m looking for USDJPY to hold 117.85 and VIX to be hammered back down to or below that channel line.
Today, it is backtesting that channel bottom just as USDJPY is seeing its first significant reversal (an endangered species) since the Sept-Oct swoon.
Should the backtest hold, the message is that stocks have fallen as far as they need to. VIX will settle lower in order to prevent things from getting out of hand and stocks will now rebound (SPX just tagged 2062 — off 12 points.)
As always, it will depend on the USDJPY’s cooperation. A more serious retracement there would trump VIX’s influence as we saw in Sep-Oct. Keep an eye on 119.28 — channel and Fib support.
So far, so good. VIX reversed as expected at the channel bottom, dropping 1.14 (8.6%) and kicking SPX 15 points higher (new highs, of course!) over the subsequent two hours.
At this point, VIX had retagged the white .886 and rebounded again over the remainder of the day. USDJPY rebounded to only the .618 retrace of its morning highs. When it failed to make any further headway, that was the end of the rally. After a round-trip of 30 points, SPX closed off 2.4 points for the day.
Any further downside will have to wait until the after-hours. But, remember, the after-hours is when USDJPY is free to decline without consequences. ES is easily propped up if that’s what TPTB have in mind.