To everything (turn, turn, turn)
There is a season (turn, turn, turn)
And a time to every purpose, under heaven

The dollar’s dip has been a headwind for the markets, but it’s served a purpose: resetting various carry trades and putting things on firmer footing for the next stage.  I don’t know whether central bankers will be able to pull it off.  I don’t even know how they’ll attempt it (though I have some suspicions.)

I only know that EURUSD’s reversal at our 1.1470 target from Jun 13 [see: The Rally That VIX Built] is quite important.  And, if DXY should slip below its recent lows, equities are not going to take it well.

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It’s getting pretty tough for the few remaining live investors to believe the Fed’s rhetoric about the need for another rate hike — let alone the wisdom of the latest one.  Yesterday’s minutes did nothing to change that.

After a nice bounce (where it needed to bounce) the DXY is sliding back into negative territory this morning, taking the bloom off the yen carry trade and S&P futures both.SPX, which reached our IH&S target way back on June 1, still needs to backtest support after its latest suspect breakout.  Will today be the day?

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With FOMC minutes due to be released this afternoon, the dollar should continue to dominate the markets.

USDJPY’s recent breakout is looking more and more like the real thing.

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The Trump Rally never made sense to me [see: Why the “Trump Rally” is a Fraud.]  Yet, breakouts are breakouts, even if they’re driven by algo trickery and trend followers.

SPX’s breakout in November was driven by exuberant spikes in USDJPY, DX and WTI and a historic suppression in VIX, which is at a crossroads.  If it’s to continue driving stocks higher — or even offset economic news that would see them correct, it must plumb new all-time lows.

Our recent bottom call on oil [see: June 20 Update on Oil] was offered with the understanding that it has a natural upper bound — particularly over the next month.  And, the US dollar…well, it is flirting with danger.  It dropped below very strong support yesterday.

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Today, it’s all about the USD.  EURUSD continues toward our upside target, while USDJPY is pedaling as fast as it can to compensate.  As we’ve discussed all week, this leaves DXY at long-term critical support.Thanks to VIX and USDJPY, equities were able to put on quite a show yesterday, rallying back above support as expected.

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Two weeks ago I floated the idea that the USD, which had broken down below a long-term trend line and bounced, wasn’t done [see: The Rally That VIX Built.]  While the effects on equities would likely be muted by drops in VIX and a rise in oil prices, currencies were in for some significant moves.

Our thesis was that US economic data would continue to come in weak, and the USD would finally be able to tag critical support — the midline of a channel dating back to 2009 and the .786 line of another dating back to 2003.Yesterday, that move finally played out, resulting in a healthy sell-off in equities.  SPX, which reversed at our upside target on Monday, dropped to slightly below our downside target — a backtest of the large Inverted Head & Shoulders Pattern we’ve been tracking and a nice 30-pt short.With futures up over 7 points this morning, is the worst over?

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Our short USD position is paying off in spades this morning, as EURUSD has broken out……and, DXY is plunging.

This should complete the move we forecast two weeks ago [see: The Rally That VIX Built.]

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SPX was locked in a nice, neat falling channel last week until Friday morning when, after backtesting the top of our yellow channel for the eleventy billionth time, two fairly common things happened:  a rising channel for VIX suddenly broke down… …and, USDJPY “broke out” of the falling channel it’s been in since Dec 8. The result: SPX broke out of its falling channel (the yellow arrow):It doesn’t matter that VIX might not establish new all-time lows, or that USDJPY’s breakout might very well be another head fake.

The only thing that matters is that SPX will have broken out of a falling channel and successfully backtested a rising channel — in other words, its “breakout” is intact.

Thus, the divergence between real economic activity and stock prices will widen just a little bit more this morning. Bottom line: fundamentals continue to take a back seat to algos which — together with passive investing and other machine trading approaches — now account for 90% of all trading volume.

As long as central banks control the primary inputs to the most powerful algos, fundamentals will matter less and less.

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After a drop to our downside target Wednesday, we were rewarded with a rise to our bounce target on Thursday.  It was an ugly close, but one which left SPX right at tentative support.

It’s a good thing we have VIX to tell us whether or not stocks will be actively supported, today.  Is the rising white channel breaking down? continued for members… (more…)

After EIA’s modestly bullish inventory report came out, yesterday, WTI dithered for a moment before heading higher.  I was prepared to throw in the towel on our 42.11 downside target when its rally reversed at the exact price it needed to in order for me to quickly regain my confidence.

The yellow arrow marks the Head & Shoulder Pattern‘s neckline that we laid out last week [see: Oil’s Dangerous Game.]   Three hours later, we bagged 42.11 and saw CL reverse as expected.  The bonus: it led SPX right to our downside target for it, as well.

This completes a pretty nice short that tested us over and over again with three separate head fakes, an aborted bounce on a channel line, and another on the neckline.Do the fundamentals support a big rebound here?  Nope, not even close.  But, fundamentals have paled in significance to technicals and chart patterns for over a year.  And, if I’m right and central bankers get their way, they will continue to do so.

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