Just about everybody seems surprised, this morning.  Those who were rooting for Clinton are, of course, surprised that their candidate lost.  Those who were rooting for Trump are surprised that the election wasn’t more effectively rigged.  Those who didn’t vote are, no doubt, surprised that their vote might have mattered after all.

The one thing there should be no surprise about is the degree to which the “market” was managed.  As we discussed on Monday in The Wheel’s Spinning:

For the record, I consider it extremely presumptuous that the election risk is over and done with.  To repeat what I mentioned earlier, we saw the exact same thing happen with Brexit.  Knowing the downside risk, TPTB ran equities as high as they possibly could before the vote.  The subsequent downturn, thus, started from a much higher level.

Monday and Tuesday were, obviously, an echo of the Brexit runup — with a runup that barely paused along the way to a 64-pt gain from Friday’s lows.It’s not such a big deal to lose 50-100 points if it’s from 64 points higher in the first place.  And, that’s exactly what we’re seeing this morning — except that TPTB learned another lesson from Brexit.  The damage control has been so effective overnight that the futures have already bounced 73 points off their overnight lows.

One tool, VIX, is lower in the face of what is still a 25-pt drop in the S&P 500 futures.  As futures were plunging last night, VIX put in a preposterous 26% decline!The world has changed.  Investors will care.  The question is whether VIX and the other tools central banks have at their disposal will be enough to prevent serious fallout as they did with Brexit.

With that in mind, we’ll take a look at the prospects of our downside targets playing out.

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It seemed like it would never get here.  And, of course, it won’t be over tonight. It’ll merely be on to the next chapter: the bickering, the legal challenges, the market fallout.

The algos voted yesterday, with an incredibly strong push that exceeded three upside targets. The only silver lining for bears is that yesterday’s excesses are settling out, with backtests of that overhead “resistance” quite likely.

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Where it stops is anyone’s guess.  But, as with Brexit, the futures aren’t taking any chances. We’ve seen a broad advance in, well, practically everything over the weekend.  If a fall is coming, it’s going to be from higher.

With SPX having reached our next downside target last week, we’ll take a quick look at our post-election targets.

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Oil just tagged our next downside target at 44.10.  It’s been almost four weeks since we called the top on CL [see: Welcome to Peak Oil.]  CL has since fallen over 14%.  And, while it’s been a great short, its influence on SPX has been almost as impressive: a 4% drop (the thin purple line below.)Unfortunately for equities, oil’s drop isn’t finished — not by a long shot.

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For starters, there’s a SMA200 down below at 43.31.  And, that doesn’t even begin to resolve the inflation problem.  As we detailed in Watching and Waiting, the follow up to Peak Oil, CL must get back down below 30 in order not to have a big impact on headline inflation figures.  Using a back of the envelope calculation, if a 14% drop in CL produces a 4% drop in SPX, then another 32% drop in CL could produce a 190-pt drop in SPX.

But, is that likely?  It depends.  SPX and ES are both likely to tag their own SMA200s this morning.  If the slide that began on Aug 15 is to be arrested, this is the obvious support.  From yesterday’s close:

Everybody and their mother will be looking for a bounce here.  As we discussed yesterday, it’s also the 1.618 extension of the small, purple harmonic pattern.  But, to assume it’s the bottom, one would have to ignore the other, more prominent harmonic patterns, not to mention a large channel dating back to 2009. Its bottom is currently at 1965, which is only slightly higher than the purple .618 at 1956.68.

Note, however, that the yellow channel charter above is only half of the channel from 2009 that actually connects the 666 lows.  Its bottom is currently closer to 1675, though they could limit it to another (5th) tag of 1823 by dragging it out until October 2017.

BTW, ES is coming up on its SMA200 at 2077.72 and SPX’s is 2082.29.  Both should need to tag theirs in order for the interim bottom to take.  Of course, with everyone planning on buying the dip, it’ll probably take an act of congress (more likely, CL dropping below its SMA200) to effect the tags.

What could drive SPX that much lower?  The biggest risk, IMO, is a departure from easy money policy.  The second biggest risk is a disappearance of carry trade vehicles.

According to Trump, the Fed has created a “false economy” and an “artificial stock market.”  He has said Janet Yellen “should be ashamed of herself.”  Suffice it to say, there would likely be a shake up in the Fed’s policies if Trump were elected.

Another possibility, though even more remote, is that the Fed starts taking inflation seriously and begins normalizing interest rates.  What goes up due to easy money, must come down — or, so the theory goes.

As far as carry trades go…if CL drops out of the running, the most obvious candidate to take over again is the USDJPY.  Recall that it broke out of the falling channel it’s been in since Oct 2015 back on Oct 4.  But, lately, the yen’s been strengthening on the apparent lack of interest by the BoJ in expanding its QQE.  It looks more likely to backtest the red channel, or at least the white Flag Pattern bottom at 100.7 than it does push up to new highs.

However, NKD is going to be testing support again, soon.  After recently reversing at the .886 at 17499 as expected, it has a 5-6% buffer before the rising white channel bottom is in danger.

Here’s the bigger picture:

Bottom line, there’s room to the downside — as evidenced by DX’s chart.But, it won’t be long before the BoJ starts getting nervous enough to rev up the printing presses again.

UPDATE:  12:33 PM

SPX just tagged its SMA5 200.  If it’s going to tag the SMA200, this is the place for it to turn. If you’re not still holding short from earlier this week, 2098.48 is your entry point — with tight stops.

For those keeping an eye on DB, there’s a clear path to 12.85 – 13.05 today.

UPDATE:  2:55 PM

Finally breaking down?  We still have a shot at 2082.29 by 3:34PM…UPDATE:  3:31 PM

Almost there.  As always, hold short over the weekend only if you can hedge or handle the gap risk.  Otherwise, we’ll see how low we can ride it before the bell.

SPX came within a couple of points of our next downside target yesterday, continuing to sell off in advance of the election and in response to oil’s and USDJPY’s swoons.  Futures are marginally higher this morning as the latest polls show a slight Clinton rebound.

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I’m traveling today, so there won’t be any intraday market commentary.  SPX hit our 2103 target yesterday and got an nice bounce.  All of our additional downside targets originally posted on Oct 13 [see: More Trouble for Mr Market] remain in place.

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There are 100,000 new MBAs minted every year in the US.  We all read the same textbooks.  We all heard roughly the same lectures.  We all learned the same formulae.  So, where’s the collective groan over the disconnect between stock prices and, well, practically everything we were taught should matter?

In 2011, all that great information began to matter less and less.  New, intrusive methods were used to prop up markets — and, I’m not just talking about QE.  I’d like to share with you today what happened, and why I think central planners are painting themselves into a corner from which escape will be difficult if not impossible.

We have a lot of new members, so I’ll start from the beginning.  If I showed you a chart like this, would you have any trouble believing the target will be hit?  Of course not.  A trend line is the simplest and most reliable of all chart patterns.What if, instead of a perfectly straight line, prices oscillated between two parallel lines — a channel?  It’s probably not too hard to accept, either. A rising, consolidating pattern of incrementally smaller price increases seems, on a gut level, to represent an impending top — which is exactly what a rising wedge portends.Likewise, the failure of a stock to make a new high on the third try and subsequent dip below the trend line supporting it — a head & shoulders pattern — is considered a reliable bearish signal.Harmonics takes more of a leap of faith.  But, after you’ve seen it work a few hundred times, it’s hard not to believe.  The Gartley Pattern promised a reversal at the .786 Fibonacci level based on the earlier reversal at the .618 retracement of the drop from 1576 to 666.  It worked nicely.

So did the Butterfly Pattern that played out at the 1.618 extension of the 2007-2009 drop.

If we put harmonics together with other chart patterns, we can see how they work together to offer important clues as to market direction.Then, there’s my favorite chart pattern: the analog.  The 2007 top wasn’t that different from most.  The turning points came at logical places, and I’ve labeled them as to how many days prior to or after the 1576 top they occurred.

As everyone remembers, it resulted in a sharp downturn that lasted 17 months and sliced 57% off the S&P 500.Imagine my surprise when, in June 2011, I saw the same pattern setting up.  It suggested a repeat performance that, were it to play out the same, would have meant new lows for stocks.

At the very least, it suggested a big drop, which I detailed in a series of posts leading up to the big event [see: Analogs.]  On July 21, I wrote: “1347 might be the last best chance at an excellent short.”  It topped at 1347 exactly, and 13 sessions later reached 1101.54.It was both exciting and unnerving, as all those formulae and all those lectures never touched on anything like this- this- what the hell was it?  Black magic?  Witchcraft?

Of course, I owe pebblewriter.com’s creation and subsequent success to this analog playing out and making a lot of people a lot of money.  But, there was a dark cloud behind the analog’s success.  It broke.

I wish I could say I knew right away why it broke.  But, it would take me many months before I fully understood the mechanism and the degree of manipulation involved.

Back then, even using the word “manipulation” was enough to make people slowly edge away from you at cocktail parties.  Talking about the yen carry trade would get the door locked behind you when you stepped outside for a moment.

For the uninitiated, the yen carry trade might be explained from the BoJ’s standpoint thusly:

You can borrow all the money you want at near 0% interest, and you can pay it back at a steep discount.  In the meantime, you can invest those borrowings in stocks that we guarantee will appreciate — because we’re buying them, too.

It took a while to get going, but it worked like a charm.  When the USDJPY bottomed and started to break out, the analog was busted.  As USDJPY rose from 75 to 100, SPX ratcheted up to new all-time highs.

There was a problem, however, with USDJPY’s continued rise.  Remember, as the yen gets cheaper, it buys less of those things that Japan imports — especially food and oil.  Oil was particularly a problem, as it’s priced in US dollars and the country had shut down all its nuclear reactors in the wake of the Fukushima disaster.

So, isn’t it a coincidence that oil began crashing on August 14, 2014 and USDJPY broke out on August 18, 2014?  The yen’s subsequent 25% depreciation was easily offset by oil’s 61.8% plummet.  And, it wasn’t even done.

to be continued…

 

 

October continued the market consolidation that began in August.  Key considerations this past month included oil topping out, in line with our expectations [see: Welcome to Peak Oil], and USDJPY finally breaking out after nearly a year in the same falling channel.  And, of course, the upcoming election has had everyone on edge.

Our theoretical long/short SPX portfolio came in at 11.28%, a 13.22% pickup over the S&P 500’s 1.94% loss. Our average since Jan 2015 now stands at 16.62% per month, versus 0.21% for the S&P.

We were able to continue decreasing the number of trade advices, averaging less than one per day for the first time in many months.  As I wrote last month, this will continue to be an emphasis for us.

Hopefully the market will cooperate.  One difference versus previous months was the reduced number of large overnight gaps.  We did a pretty good job of anticipating those that did occur.Today marks the last day of our membership promotion, and is also the last day we’ll be offering annual memberships — at least, for a while.  To learn more and to take advantage of the discounts being offered, CLICK HERE.

 

Final 24 hours for our membership promotion.  Beginning in a few days, we’ll offer only monthly memberships — currently sale priced at $150/month.  So, for the price of about 7 months, you can enjoy full access to pebblewriter for an entire year.  To sign up now, CLICK HERE.

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CL nailed yesterday’s downside target and is getting a bounce, which is enough to trick the futures into a 5-pt gain just ahead of the open. The questions are how big the backtest will be, and how long it will last.  We remain short from 2139.23 on Oct 27 [see: Distress Call] and yesterday’s downside targets remain unchanged.

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