In our last update on RUT [see: Dec 8 2016 Update on RUT], we noted that RUT had almost reached a potentially important turning point.

If it follows the same general pattern as SPX (as guided by our analog), it’s getting fairly close to its next turning point at 1392.

As it turned out, RUT tagged 1392 the very next day and reversed as expected.  But, those licking their chops over a great shorting opportunity were disappointed.  After six long weeks of chop, it managed a miserly 3.6% decline.

Three weeks later, we’re right back to 1392 — begging the question: what’s next?

continued for members… (more…)

Another ramp job is underway, this time led by a resilient USDJPY.  Though CL is in a position to be the spoiler as it might finally recouple with the incredibly bearish fundamental picture.

A reminder: this is a big week for economic data — with PPI, CPI, retail sales, housing starts and permits, Philadelphia Fed and leading indicators all on deck.  The most important, IMHO, is CPI.

Though the Fed supposedly doesn’t use it, and though it woefully understates the true state of affairs, a significant headline beat of the 0.2% expected could be the tipping point for the Fed’s March meeting.  We’ll look for some hints in Yellen’s testimony on Tuesday.

continued for members… (more…)

Over the past two days, I suggested the USDJPY was breaking out in anticipation of weakness from another algo driver — CL.

We’ve seen VIX do a pretty good job of preventing big sell-offs.  If a rate rise seems imminent, we should see the dollar strengthen and, potentially, a breakout in USDJPY — which would help…. Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate. The yen carry trade has been dormant, but is far from dead.

Indeed, the USDJPY has broken out of the falling channel it’s been in since last November (even as Japan’s Abe — accused of being a currency manipulator — pals around with his accuser over the next few days.)  But, CL has continued to rally, too — in the face of huge inventory builds as reported by both the API and EIA.  And, of course, VIX is also setting records (for the level of intraday absurdity and manipulation  – more on that later.)

Is this the breakout we’ve been waiting for, or is it the calm before the storm?

continued for members… (more…)

It seems like I bitch about VIX nearly every day.  Once a good indicator of fear in the stock market, VIX is now used as a tool to stop declines dead in their tracks and boost stocks to new highs.

Picture a 23-year old MIT grad in a windowless room on, say, Dearborn Street in Chicago, with a big red button like the one to the left in front of him and a single monitor displaying SPX.

Whenever stocks come close to a 1% decline or threaten to make a lower low, an alarm goes off.  The kid starts mashing the button for all it’s worth, shorting VIX until SPX reverses — which it does, nearly every time.  For those who care about such anachronisms as market integrity, it’s terribly vexing.

Anyone who watches the “markets” closely every day knows the scenario all too well.  It has produced countless V-shaped recoveries and a steady string of new highs.  As of yesterday, it had been 82 days so far since a 1% loss in SPX.  The last time this happened was in 2006, when the streak reached 94 days.  Before that, it was in 1995 that it reached 105 days.

All together, there have been only 22 instances in the 17,000 trading days since 1950 (when the S&P 500 index was created) where SPX went 105 or more days without a 1% drop.  A quick glance at the chart below from the Statistical Ideas blog shows the same info in graphic form, and illustrates how negative days have become increasingly rare over the past few years.  Of course, it was during this time period that central banks became more actively involved in propping up markets.

Yesterday was one of those days that had loads of potential to break the streak.  Crude oil, another driver of bullish algos, had shed over 5% in the past two days and was being buffeted by the second worst inventory data in history.  Another favorite of the market manipulators, USDJPY, was capping off a nearly two-month decline.

Economic data has been weak lately: everything from consumer credit to construction spending.  And, the president so many expected to be lowering taxes and goosing spending by now has shown more interest in tweeting than in fixing the country’s problems.

It was no surprise that VIX started the day by breaking out of the falling channel it’s been in since the election.  But, as I noted in the daily post, it was the 6th such time VIX had broken out in the morning.  Each previous time, the breakout failed and stocks closed higher on the day.  Would this time be any different?

VIX started the session off with a 4.4% spike off the previous day’s close, which correlated nicely with SPX’s gap lower and subsequent 7-pt drop.  And, the EIA’s crude inventory report was coming up shortly.

At 9:52 AM, the VIX kid must have decided enough was enough.  Within the next hour, VIX was slammed back down to its previous close.  I didn’t think too much of it at first, as it’s not unusual to get a rally leading up to 10AM.

But, when the crude inventory data came out at 10:30 AM and CL and SPX both started selling off, VIX gapped down sharply.  The rest was textbook VIX manipulation.  Note that VIX had established a trend line, shown below in as the dashed purple line, that was swiftly broken.

VIX bounced just above the previous low (the asterisk below), which meant there was a chance that SPX  — which had rallied 9 points by then — might run out of steam.  We’ll walk through the remaining turning points, signified by letters in the charts below.

a.  SPX did sell off as VIX bounced.  SPX even broke down below trend line shown in red.

b.  As SPX broke down, VIX suddenly plunged to new lows, sending SPX back above the broken TL.

c.  VIX bounced up to its SMA10 — its second backtest — allowing SPX to decline to a marginally higher low.

d.  VIX tumbles sharply — another lower low to prevent SPX’s purple TL from breaking down.

e.  Another near breakdown of the purple TL…VIX responds with even lower lows.

f.  New lows for VIX, now off 5.2% since its earlier highs, allows SPX to break out above the neckline of an Inverted Head & Shoulders Pattern.  It’s now gained 9 points and is firmly back in the green for the day.

g.   Someone decides they don’t want SPX closing above the neckline (dashed, purple line), and VIX bounces until SPX falls back to SMA5 200 support.

h.  The usual VIX end-of-session sell off sends SPX back above the neckline.

i.   VIX’s little spurt at the close ensures that SPX finishes precisely on the neckline — leaving both bulls and bears scratching their heads re overnight positioning.

There were other things going on during the session, of course.  Despite the ugly inventory data (second biggest build in history, remember) CL was shoehorned higher — finishing with a slight gain on the day.  And, USDJPY continued its pattern of threatening to break out of the falling channel it’s been in for several months.  I count eight distinct tags of the channel top on the 5-min chart — each of them when SPX needed a helping hand, of course.

Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate.  The yen carry trade has been dormant, but is far from dead.

Now on to this morning’s charts, which hint at somewhat more exciting days ahead.

continued for members… (more…)

With CL finally melting down and the USDJPY failing to break out (despite four close calls yesterday), it’s up to VIX to prop up stocks today…if it can.  It’s tried to break out of its falling white channel six distinct times since the start of the year.  Each time, it’s been smacked down — effectively putting a stop to the decline.  Will this time be any different?  We remain short from 2297.02 and our downside targets remain the same.

continued for members… (more…)

When I called a top in oil last October, I added the caveat that we could get a replay of the previous year’s delaying ramp that would keep stocks rising into the year-end.  As it turned out, it wasn’t just a delay; it produced marginally new highs (+3) that sent SPX to new highs as well.

This all occurred against a backdrop of soaring inventories in crude and an increasing rig count — which made the price manipulation all the more obvious.  Yet, here we are.  CL is back to where it was in October, at roughly double its Feb 11 lows.   With inflation having reared its ugly head, thanks largely to oil, is it any surprise oil is off sharply the past two days?  And, is it any surprise that the other members of the “market” support troika are working overtime to keep stocks from following suit?

continued for members... (more…)

We’ve discussed the ultimate outcome of our analog countless times.  It provided higher price targets all along, aeach of which was met or exceeded, even as normal retracements or backtests have been largely prevented.

Given the enormous manipulation going on in oil and VIX, in particular, it must be a little disconcerting to TPTB that they haven’t achieved more of a breakout.  Is it a sign of the flagging effectiveness of the manipulation, or is it possible that a meaningful backtest will finally be allowed?

The key might lie with USDJPY, which just tagged our 111.98 target from last week.  Better late than never!continued for members…

We’ve had breakout after breakout, but the net point gains have been modest. Part of the reason for the modest returns has been USDJPY,which has been managed steadily lower since mid-December.  There is certainly plenty of room for it to work lower.  111.985 is only a 38.2% retrace of the post-election rescue operation.But, remember, it never quite reached the obvious target of 120.11 — preferring to leave it available for another leg up.  I can’t shake the feeling that a rally to 120.11 or slightly above is being held in reserve for either (1) the next time a rescue is needed, or (2) the next important breakout.And, that’s where CL comes in.  We know that it’s still sitting at twice its Feb 11, 2016 price of 26.05.  Unless it starts falling right away, gas prices will come in at around 30-35% YoY higher this month.The January CPI numbers coming out on Feb 15, even if massaged extensively, are likely to show a pickup in inflation – which had already tripled (from 0.7% to 2.1%) in the past two years in last month’s report.  My guess is at least 2.5%.TPTB have a very narrow window within which to take oil prices back down if they wish to avoid a higher headline number for February than in January.

Frankly, I’m surprised it hasn’t happened already.  I can only assume the forces working to keep oil elevated since it “broke down” from that rising purple channel on Jan 9 have very deep pockets and are very determined.  Or, maybe they’re just amassing huge hedges.

In his remarks this morning, Mario Draghi said that “underlying inflation pressures remain very subdued and are expected to pick up only gradually.”  Looking at the charts below, the word “gradually” hardly seems to fit.

Likewise, in its statement last week, the FOMC downplayed the risks of inflation, stating that:

Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.

Again, the CPI charts tell a different story.

Of course, the Fed looks at core inflation, ignoring the contributions of the “too volatile” food and energy categories.  Unfortunately, the average Joe doesn’t have the luxury of ignoring these costs, and has to pay actual rent increases instead of owners’ equivalent rent — a phony definition of rent that vastly understates actual inflation.

Last October, Janet Yellen talked about letting the economy “run hot,” wondering aloud whether a “high pressure economy” could reverse some of the damage done in the GFC.  But, in her Jan 19 speech at Stanford, she stated that “allowing the economy to run markedly and persistently hot would be risky and unwise.”  

She went on to say it “will not be easy to find a path of rate hikes that can foster strong jobs growth and 2-percent inflation, given the uncertainties of global growth, slow domestic productivity growth, and a change in fiscal policies, among others.”  

She left out the part about rising interest rates being a headwind for stock prices, and how keeping inflation in check would require oil prices tanking in the near future — also a major impediment to the market’s ongoing melt-up.

And, how will the impending trade war(s) and a persistently high US dollar impact the Fed’s plans to raise rates?  Exports are off and imports are on the rise.  Can the Fed engineer a lower US dollar, higher interest rates and higher stock prices all at the same time?  Not unless the laws of mathematics are repealed and replaced.

I think the more likely scenario is to raise rates in March (I know, I’m very much in the minority here — what else is new?) and let the dollar — and, thus the USDJPY — continue to appreciate while forcing a mini-crash in oil and gas.

It’s a tough bet to make, as USDJPY’s momentum has been just plain lousy.  After becoming wildly overbought post-election, USDJPY maintained negative divergence for two months with RSI only recently breaking down.It should bounce here.  But, if not, USDJPY’s SMA200 is approaching the purple .618 at 107.86. And, its SMA100 just crossed the purple .500, which is the next lower level of support.All this leads me to the following theory.  If CL breaks right away, and if USDJPY doesn’t bounce, and if VIX doesn’t plunge back below 11, we could get a sell-off to 2250-2255 this week, and another decline to, say, 2245 by Feb 23.

It works from a channel standpoint, allowing SPX to remain in the sharply rising yellow channel that dates back to Nov 4.  It also works from a harmonic standpoint — with 2245.07 representing the white 1.272 extension that was set up by the decline to the white .786 on Jan 31.

But, that’s a lot of if’s.  And, thus far, declines of any size have been very hard to come by.  Much more common are break outs motivated by sudden swoons in VIX and sudden spikes in CL and USDJPY.

If it were to happen, such a decline wouldn’t even make a dent in the post-election spike (a 23.6% retrace would be 2249.)  In fact, the daily chart argues for a deeper retracement to, say, 2220ish — the top of the rising white channel that SPX broke out of in November, the purple 1.272, and the gray .382.  It would also facilitate a tag on the midline of the rising purple channel which dates back to the Brexit lows.  It can be seen nestled in between the large yellow channels .236 and midline in the chart below.Bottom line, there are countless lower targets that would each make perfect sense in one way or another.  But, our analog, which has worked so well in identifying turning points so far, recently erred regarding Day 141.

It should not have involved a breakout; nor should it have involved a higher high.  As such, the odds are that the analog has finally broken down and we’ll push to new highs before any significant downside sets in.

Just know that the potential is there should all those “ifs” come together.

UPDATE:  1:20 PM

SPX is coming up on our next downside target, the .618 at 2288.08.  Traders — be aware that we could get a bounce here.  The SMA5 200 was just tagged.  Even though CL has broken below its SMA10 and USDJPY appears headed lower, we’ve had plenty of overnight gaps higher lately.  VIX, having been brought back into the falling white channel, is in a position to break out…or not.

Note that CL isn’t that far from support at its SMA100 (49.66) and SMA200 (47.94.)Note, also, that ES has backtested its SMA10 as expected.  Bottom line, the risk of a breakout remains elevated.As always, only hold short overnight if you can hedge or handle the gap risk.  GLTA.

More Hostgator problems this morning — third day in a row.  I thought things were resolved yesterday after two hours on the phone with them…apparently not.  Gladly accepting any recommendations for a new hosting company.  Anyone out there really, really happy with theirs?  Please contact me directly.

 *  *  *

I’m watching both USDJPY and CL break trend this morning, selling off after a supposedly bullish employment report.  But, VIX’s 10.4% decline from yesterday’s highs is offsetting both, ramping ES by nearly .50%.  Is VIX the only tool that matters any more?continued for members… (more…)

I had the privilege of speaking to a group of bright, young Masters of Financial Engineering students from my alma mater on Tuesday.  After relating some truths about how markets are manipulated day in and day out, I wondered whether the message had been too frank and too, well, depressing.

Are things really as bad as they seem, or have I become too cynical?  I didn’t have to wait long for an answer.

Yesterday’s FOMC statement had the potential to disappoint.  If the FOMC were to publicly acknowledge the elephant in the room — surging inflation that they, themselves, created — interest rates would certainly be much higher than they are and heading higher still.

In the seconds following the FOMC’s 2PM release, SPX started to dip below a very minor trend line (in red below) and the 200-period moving average on the 5-min chart — often intraday support.TPTB responded with a stunning 16.6% smack down on VIX that sent it lower than it has been since February 2007, only .58 above VIX’s all-time low of 9.39.  It was enough to put SPX back above the TL and, briefly, back above the short-term moving averages.Oil, fresh off back-to-back bearish inventory reports Monday and Tuesday, also helped out with a 4% ramp.  Price discovery at its finest.

Thinking back, my message probably wasn’t frank enough.  The FOMC hates for the “market: to decline on days it makes rate announcements or holds press conferences.  It’s important to Yellen et al. that investors have confidence in the wisdom of its actions — or, in this case, inaction.

How much longer can this go on?  I don’t really know.  But, it has direct bearing on the outlook for our current analog.  So, I suspect this is the attempt to break out of the pattern that has guided our forecasts reasonably well since August [see: New Analog – Aug 3] and would send prices much lower in the weeks ahead.

continued for members… (more…)

Today is setting up as a potentially wild ride, with plenty of earnings, employment, oil inventory and sentiment data to digest…on top of a FOMC rate announcement that could surprise in its hawkishness.

SPX came within 5 points of our next downside target yesterday before VIX began its daily plunge — this time a 10.8% crush after coming within a smidge of our 13.01 target.  VIX’s plunge continued overnight and, along with USDJPY’s bounce off our downside target and CL’s usual ramp job has levitated the futures just ahead of the open.continued for members… (more…)