It was a rather listless after-hours, with ES meandering back and forth across its SMA10 following yesterday’s continuing bounce off our initial downside target.Consumer sentiment and leading indicators will be released at 10am this morning, perhaps offering traders some direction.

In the meantime, oil and gas have bounced, USDJPY has slumped, and VIX is back down to its recent lows.

Deutsche Bank, the systemically important bank that no one talks about, continues to drift southward.

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Lots of targets being hit, lately.  We’ll start with EURUSD, which tagged the channel top we had originally scheduled for later in September.  ES nailed our .786 and channel midline target.

VIX slightly exceeded our 16.66 target.And, most importantly, WTI came within .07 of our primary downside target and has yet to bounce much.

Since it fell just short, and RB remains a few cents above its target, we’ll take a look at the road forward for CL and RB and how they should impact the bigger picture.

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Plenty of big chart developments this morning, with many of our targets close at hand.  The biggest potential development is ES’ red channel breaking down – at least for the moment.

While this could be a garden variety V-shaped dip to 2803-2810, the run up in VIX (+11.7%) and continuing plunge in oil and gas (today should be the day) argue for more.Currencies are still on our radar, as EURUSD is nearing our 1.1281 target and DXY has broken out of a rising channel.On the Turkey front, the lira continues to strengthen — a deal in the works?

If so, it’s sure not being reflected in DB — now down 16% since reaching our last upside target.

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It has taken a strong bounce in CL/RBOB and a 6% smackdown in VIX just to produce a 6 point gain in futures this morning.  But, for now at least, ES’ rising red channel remains intact.

Only if SPX/ES pushed back above their .886 Fibs would I have much faith in a bigger bounce.

Though the Turkish lira has strengthened a bit, the problem has clearly not gone away.  It would need to return to below 6.5 to the euro and 5 to the USD to get back to merely rapid depreciation.continued for members… (more…)

The current crisis in Turkey has been a long time coming.  A little over two years ago [see: Turkey Sinks to New Lows], we discussed how Recep Erdoğan’s heavy-handedness would come back to haunt Turkey.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

True to his colors, Erdoğan is now threatening to fine and/or jail those who speak the truth about Turkey’s untenable currency situation.  The Capital Markets Board in Ankara released the following:

“Those who report misleading, wrong and false stories on listed companies, banks and other financial entities that could impact investor decisions could be fined or sentenced to two to five years of imprisonment.”

At this point, the entire financial world is wondering whether Erdoğan will see the light or go down swinging, taking the Turkish economy with him. And, can the spillover effects be contained?  Many have pointed out that the Turkish lira is more systemically important than was the Thai baht.

Things are looking dire for the lira.

And, as we discussed last week, the euro has not been immune – finally breaking down from its rising channel.

Whether actually exposed or simply guilty by association, Deutsche Bank (my favorite canary in the coal mine) continues to suffer.  After reaching our upside target two weeks ago, it’s racing toward our next downside target.

While a timely recovery in USDJPY and reversal in VIX have futures back to flat, it remains to be seen whether the damage will spread.

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The currency crisis in Turkey is finally spilling over into the euro, which is finally breaking down.  Not to worry, as we’ve been here before.The complication, of course, is that CPI remains stubbornly high at 2.9%.  This is dangerous territory and greatly exacerbates the difficulty the Fed faces in threading the needle of interest rate hikes.

As a net importer, the US needs dollar strength to keep inflation under control.  But, continuing dollar strength could do untold damage to euro zone banks which are grappling not only with dollar-denominated obligations but with Turkish lira exposure.

Witness Deutsche which, try as it might to recover, is off over 6% today.

By working to establish a buffer for the next financial crisis, the Fed might have hastened its arrival.

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RBOB came within .0045 of our next downside target this morning – an 8.4% gain for those who shorted on July 27.  For those satisfied with the easy money, 2.002 is as good a place to get out as any.

For those willing to roll the dice just a bit, there is more downside potential as the 200-DMA is drawing tantalizingly close.

From the post Q2 GDP: July 27, 2018:

RB continues to inch higher, breaking through the TL but reaching channel and Fib resistance.  The falling gray channel top should provide solid resistance if RB can break 2.18.  However, note that RB is already at the upper bound of the range established in June. Given that it just bounced at horizontal support, I suspect it’ll reverse here at horizontal resistance.

July inflation is already in the books.  This morning’s PPI (+3.3% YoY, 0.0% MoM) supports our view that CPI will come very close to 3%.  As expected, oil and gas prices were important components.

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Watching the goings on at Tesla these days, I’m reminded of the Queen classic “I’m Going Slightly Mad.”

I’m one card short of a full deck, I’m not quite a shilling
One wave short of a shipwreck, I’m not my usual top billing
I’m coming down with a fever, I’m really out to sea
This kettle is boiling over, I think I’m a banana tree
Oh dear…

I’m going slightly mad, I’m going slightly mad
It finally happened, happened
It finally happened,
It finally happened
I’m slightly mad, very slightly mad
Oh, dear.

It’s hard not to admire Elon Musk and all he’s accomplished.  But, while there’s obviously a method to his madness, it’s hard not to wonder if the pressure might be getting to him.

Just look at the stock.  After going sideways for two years, TLSA spiked 10X in only 16 months (the red acceleration channel below.)  But, once that channel played out, the stock struggled — going nowhere between Feb 2014 and Apr 2017.

The stock made three separate runs at $300/share, falling short each time.  Finally, on April 3, 2017, the stock punched through.  

Musk celebrated with a tweet.

On Mar 27, 2018, it fell back below that horizontal support and broke below a trend line (purple) connecting its two previous lows.

Again, Musk turned to Twitter — hoping shareholders would pass off the 37% decline since Sep 2017 as a clever April Fool’s joke.  Most didn’t find it very funny.

Three days later, the company reported a 40% increase in overall Q1 production with a doubling of Model 3 production.  TSLA recovered 13% that day and, the following day, pushed back through 300. But, the move didn’t hold.  TSLA spent the next two months holding on for dear life.  As we noted in early May [see: Can TSLA Avoid a Crash?] holding the purple trend line and 290 support was critical.

It has neckline support at 290 and trend line support at 270ish.  Unless it drops below that support, resist that urge to short it.

Finally, when Musk assured shareholders at the company’s June 6 annual meeting that the Model 3 production would reach 5,000 units weekly by the end of the month, the stock soared again.

But, it didn’t stick.  Despite Musk’s much-publicized open market purchase of his own shares, the stock couldn’t do more than backtest the broken white channel, falling well short of its September highs.  It fell back below its 200-DMA and backtested 300 all over again.

It might still be sitting there if not for — that’s right — another tweet.  This one dangles the prospect of an LBO at $420.

The fact that the stock is still sitting $50 below $420 means there are plenty of skeptics.  In fact, the SEC is investigating whether an LBO is actually in the works, financing secured, or this was merely a ploy to help the stock recover.

At $420, the LBO would be the biggest in history, slightly exceeding the TXU deal in 2007.  Interesting side note: the TXU deal was completed 4 days prior to the S&P 500’s 2007 peak and the beginning of its 54% crash.  TXU filed for bankruptcy seven years later.

Let’s hope (for the sake of Elon Musk’s sanity) that TSLA has a better outcome.  If the LBO is a hoax, don’t hold your breath.

We all know about the strong earnings, stimulative tax cuts, low unemployment, etc. which have driven this recovery.  These are the headlines that scream for our attention every day.

Here’s a quick counterpoint: the algo-driven aspect of the recovery. For those not familiar with Fibonacci ratios, here’s a quick primer. Suffice it to say that SPX has paid a great deal of attention to key Fib levels over the years.

Since SPX first sliced through its 2.24 extension at 2703, there has been a battle brewing — with bulls desperate to hold the newly acquired support.

I present below just a few of the weapons used to motivate algorithms (and, the relative handful of carbon-based traders still standing) to ignore tariffs, geopolitical instability, rising inflation, tightening monetary policy, and stagnant real growth.

• Jan 3: SPX popped above its 2.24 Fib extension, the result of oil breaking out of a rising channel it had been in since April 2016
• Feb 9: the first 200-DMA tag since Nov 2016
• Mar 23: the second 200-DMA tag
• Apr 2: SPX closes below its 200-DMA, DJIA makes lower lows
• Apr 4: Bullard – no reason to hike rates any further
• Apr 4: Kudlow – Tariffs may not take effect; if do, would end in “pot of gold”

• May 3: Another 200-DMA tag. VIX crushed 42% in 24 hours, continues to fall until SPX rises back above its 2.24 Fib at 2703.
• Jun 25: VIX begins another 42% drop, continues until SPX above IH&S neckline
• Aug 6: Bullard – recessions need not follow extended expansions
• Aug 7: VIX reaches new lows
• Behind the scenes, oil rallied 30% between Feb 9 (cycle lows) and Jul 3 (last backtest of 2703) dipping just enough each month (watch it today) to justify understated CPI

Something to think about as stocks approach new all-time highs…

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With the July highs taken out yesterday, all that remains is the January highs.  Thanks to a return to the Dec 2016-Jan 2018 regime of VIX bashing (lowest since Jan 16 this morning), there appears little doubt.

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