The S&P 500 is up over 10% for the year (well…if it closes above 2248.33.) Is it time to break out the champagne and party hats?  We’ll take a look at how stocks got to where they are, and what to expect in the coming year.

The Ascendency of VIX

One of the biggest developments this past year was central banks’ perfection of VIX as a tool to drive stocks higher.  Long considered a good indicator of risk in the markets, VIX is now being used as a tool to ignite momentum-driven algos that push stocks higher.

Those of us who follow VIX closely have seen this coming for a while.  Even Main Street analysts have noticed the VIX-smashing that frequently occurs in the last hour — or, even minutes — of trading.  But, 2016 saw TPTB take it to a whole new level — with major losses averted by timely, trend-changing collapses in VIX.

In addition to a well-crafted falling channel (below, in white), VIX’s chart illustrates two major trend breaks (the white arrows.) 

The first occurred on Mar 16, when VIX gapped below a 7-month rising trend line to help establish a new falling channel.  It might now have seemed that significant at the time.  But, it helped SPX break out past major hurdles: a trend line off its Dec 2015, pre-Fed hike highs, and the 200-day moving average.  Instead of continuing lower, SPX’s rally continued up to its 2015 highs, eventually topping them.

The second incident occurred in the wake of the US election.  VIX had climbed steadily from 12.73 to 23.01 in the days leading up to the election.  On election night, however, as it became apparent that Trump was going to win, futures began a massive sell-off (124 points, or 5.7%.)

Instead of spiking higher to reflect that panic, VIX suddenly collapsed — the very opposite of what should have happened.  Honestly, I mean, who panic-sells VIX in the midst of a 5.7% bloodbath in equity futures!?

And, they did it twice.  The first time, VIX was hammered from 20.35 to 15.73 in a matter of minutes, which stopped ES’ bleeding.  But, traders bid VIX right back up to 21.17.  So, VIX was hammered a second time, this time a more gradual affair that didn’t really end until December 21, where it finally reached a trend line going back years.

November 9 was the single biggest daily drop in VIX since May 25, 2010, when VIX was hammered over 9 points (a total of 24 points in 4 days!) to successfully prevent a similar melt-down in stocks.  The net result this time: not only did SPX avoid following through with the futures’ earlier action, it pushed up to new, all-time highs.

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The Nikkei 225 (NKD) makes a great statement about the silliness of the past seven weeks.  Like US equity futures, it fell apart on election night, only to be resurrected by algos tied to the prices of oil, which rallied 27% off its lows, and USDJPY, which rallied 17%.  

NKD’s subsequent price action was, to put it mildly, absurd.  It was as though the dip never occurred, and was thus irrelevant to the ridiculously steep, rising channel [in what universe is the election of a protectionist president bullish for one of America’s biggest trading partners?]

When USDJPY reached our upside target two weeks ago, we waited for the other shoe to drop.  Surely, it would retrace some of its gains, if only to flesh out the channel.

When the red channel finally broke down a few days ago, though, it continued sideways — until yesterday, when it finally dipped just enough to tag the bottom of an expanded channel that captures most of the Nov 8 dip.

The net result: an unbroken rising channel where the “drop” to the channel bottom didn’t produce any lower lows.  Mission accomplished.  And, just in time, as the end of the year is right around the corner.

People often ask me if charts still work in an era where “markets” are so easily controlled by central bankers and algos.  Once you discount the extent to which prices are determined by fundamentals, it opens up a lot of opportunities in forecasting.

No, it’s not like it was 3-5 years ago.  But, in some ways, it’s easier to anticipate what the guys plotting out the “markets” have in mind.  They usually still care about maintaining a veneer of normalcy — a facade of efficient markets.  Often, that’s enough information to guide our forecasts.

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This is the time of year when charts get downright silly.  Stock prices, which are highly susceptible to algo-linked manipulation anyway, are completely under control in this low-volume environment.

A casual glance at the USDJPY chart bears this out.  It’s nothing but a series of breakdowns which morphed into breakouts.   The only saving grace of such an environment is that it sets several juicy trading opportunities for the new year.While indices never dipped appreciably as they might have in the middle of the month, our upside target remains unchanged and our analog remains on track.

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We will be closed for the holidays December 22 – 27.

I want to wish all our friends a very merry Christmas.  Whatever your faith tradition, may this season be filled with peace, joy and hope.

It’s been a while since we last updated natural gas [see: Mar 28 Update.].  At the time, NG had bounced up to 1.852 after recently testing the 1999 lows.  I wrote that, despite strong selling pressure and upcoming seasonal influences…

…there’s strong support for NG, and TPTB might well have made up their minds that it WILL NOT GO any lower.

I placed an upside target at 2.058 — the top of the falling gray channel NG had been in since 2014 — and we waited to see if it would break out or break down.  We didn’t have long to wait.

The following day, NG gapped up above a key channel midline.  Six days later, it tagged the red target (2.074), consolidated for two weeks, then broke out of the falling channel for good.Just this month, it reached 3.777 — more than doubling its Mar 28 price in little more than 8 months.  So, it’s an excellent time to update the charts.  Is NG running out of juice, or is there more left in the tank?

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VIX just reached a 10 handle, something it hasn’t done since Aug 5, 2015 — shortly before SPX fell off a 245-pt cliff.

If you were to ask me how low VIX can go, I’d have to answer “as low as it needs to in order to keep stocks melting up.”

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Pity the poor guys working the VIX button this holiday season.  They’ve had no rest for the past few days, and are unlikely to have any until after the new year dawns.

Yesterday was a prime example.  ES made several attempts to break down before the open, only to be undone by a 5% decline in this “fear indicator,” most of which occurred in the first minute of trading.  There were other attempts by SPX during the session, each of which was quickly dispatched by VIX hitting new lows.

It wasn’t until CL finally got the message and started ramping higher that VIX finally took a break and popped up just high enough to suck in some bears before the close.  After the close, VIX plummeted again, ensuring another break out this morning.

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Today, we get a chance to find out whether or not our analog from several months ago is still on track.  It’s shaping up nicely so far, with USDJPY and CL both coming down off their recent highs and the futures sitting just barely in the green.

Analogs are funny things.  Since we first announced this one on Aug 3, it has taken lots of twists and turns.  I abandoned it twice, only to realize it had merely shifted due to some of the exogenous events along the way.

But, overall, it has provided great insight as to what to expect, even as the trading environment continues to be very difficult.

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It’s quad-witching Friday, which means we’ll likely see plenty of swings and plenty of head fakes in the light volume ahead.  Our analog remains on track, with no change in our outlook.

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Thanks to docjay for pointing out that gold is nearing the downside target from our Dec 5 Update.  A word of caution, though: GC is currently testing an important internal TL of support even as DX is testing important overhead resistance.

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