10Y rates broke out above a 30-year channel top yesterday, finally settling the argument as to the Fed’s priorities.We selected 28.56 as the upside target 9 months ago as it represented a significant enough Fib level and the top of the falling white channel.  From Jan 10’s China – It’s Not Me, It’s You:

Our view was seemingly confirmed on Feb 2 when TNX reached 28.56 and ZN reached the bottom of a long-term price channel.  It was strange, though, that the 10Y spurted up to 28.56 on the same day that SPX’s acceleration channel from Nov 9 broke down and SPX fell 59 points.

The following day, SPX fell 114 points.  And, it didn’t stop falling until Feb 9, 340 points off the January highs.  Bond prices, which normally move inversely to stocks, fell right along with SPX — and kept falling even after SPX bottomed out.  The chart below shows SPX vs ZN: 10Y prices.

Looking at it another way, we can see how 10Y yields continued marching higher as stocks plummeted, topping 28.56.  The rising red trend line from July 2016 wasn’t steep enough.  A new, steeper TL (below, in purple) took over in Sep 2017 and kept guiding yields higher until May 17.  

Fine-tuning the falling white channel, I was able to connect this peak with the previous highs from 2000 and 2007.  Like many, I noted that these previous TNX peaks had aligned with SPX peaks.  In other words, if yields fell hard as they had those previous times, stocks were quite vulnerable.

The charts suggested a drop in yields; and, so did common sense.  With $22 trillion in debt and a budget deficit topping $1 trillion, rising interest rates were unthinkable.  Or, so I thought.

I had assumed the FOMC would be able to read the writing on the wall and would take action to prevent rates from breaking out.

I don’t really think they want a breakout.  But, inflation being what it is, they’ve painted themselves into a corner.  USDJPY reached our next upside target last night, so the yen probably won’t be much help.And, oil and gas are very long overdue for a tumble — that inflation problem, again, not to mention a slew of chart patterns that spell a reversal. Note that CL has reached our 76.50 target from January.

So, here we are, this morning, with ES off 12 points, but having narrowly avoided (again) tagging its SMA20.  Usually, when this happens day after day, it’s because there’s a rising channel bottom or moving average which would make for a bullish backtest.  

This time, it smells of a failure – meaning the 10Y’s breakout is a head fake.

With VIX poised for a breakout…

…stocks might be in real trouble here.

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Another day, another after-hours meltup.  Put it all on black and give it another spin, right?  At least, that’s the message VIX is sending.

But, there are a few important caveats that suggest the message might well be a head fake.

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VIX has dipped back below the yellow channel bottom.  As long as it continues slipping lower, SPX and ES’ upside targets are presumably intact — unless oil and gas spoil the party. The hitch remains CL and RB, which not only reached overhead resistance by our measure, but must deal with inflation that’s too high, bearish API data, another round of Trump tweeting, and a large build in EIA inventory.  I think the time has finally come to revert to short, but with relatively tight stops in case this is another head fake. Then, there’s USDJPY which, as we’ve discussed, has reached channel backtest resistance.

Together with EURUSD and a resilient TNX, the pair is keeping the DXY on the rise. If it falters here at what is also very obvious horizontal resistance, stocks will come under considerable pressure. Bottom line, keep a very close on eye on VIX, USDJPY and CL. If, as I suspect, CL and USDJPY have topped out and VIX breaks out, SPX’s breakout will fail and we can look forward to sub-2500 prices.

GLTA.

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The market is quite healthy, or so goes the narrative.  Yet, day after day, we see signs of it “breaking” in the after-hours – only to be “fixed” in a V-shaped recovery the next day.

The usual “fixers,” oil, VIX and USDJPY, have limitations.  Oil can only rally so much before generating worrisome inflation headlines.  The yen can only sink so low before it starts to hurt Japanese consumers and corporations.  VIX can usually be counted on to decline when necessary.  But, there are lines in the sand that have a history of mattering.

With USDJPY and CL approaching important overhead resistance, is it now up to VIX?  Can it manage to inspire new highs or is that too much to hope for?

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Following news of a partial resolution to the US-Canada trade breakdown, futures are up about 16 points.  Aluminum and steel remain unresolved.  And, of course, there’s the issue of trade wars with the rest of the world.  But, for now, the algos are happy.

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