USDJPY recently failed, again, to break out past overhead resistance, dropped to our 110.75 target [see: Unscripted] where it momentarily bounced for a couple of days before dropping through its SMA200.  Any time the USDJPY drops through its SMA200, it’s significant.  With EURUSD also threatening to break out, this is a good time to look at both of them and the likely effect on DXY.

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If you enjoyed Wednesday, you really enjoyed yesterday’s algo-driven meltup too.

VIX, USDJPY and CL engineered a striking recovery and reversal.  ES put in a low which should help define a rising channel, then rallied strongly into the close.

The recovery was driven by VIX, which suddenly collapsed down through the red TL and SMA5 200 shown below…

…USDJPY, which spiked higher into the US equity close…  …and CL, which bounced off the channel bottom it was backtesting.

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It’s not usually so obvious. The reality is that the guys who usually push the buttons and pull the levers behind the curtain are all off on vacation.

The ones left behind lack the deft touch that’s required to manipulate the stock market without it being quite so obvious.

For you doubters, here it is in very simple terms.  We all heard about Mnuchin assembling the Plunge Protection Team as the S&P500 nuzzled up to bear market territory.  It actually closed down 20.05% from its intraday highs on Monday.

Then this happened yesterday, the very next session.  It’s what the PPT does.  It’s what they’ve always done.  As usual, it worked.  And, it had nothing to do with retail sales, presidential tweets or employment figures.  Here’s how it works.

Only about 10% of all trading volume is conducted by fundamentally-oriented, discretionary managers.  So everything else is either index, quasi-index, smart beta, trend following, risk parity, or some other quantitatively-oriented strategy.

The one thing they all share in common is that they all react to what’s happening in the market.  If you can produce conditions that cause them to react, you can be the tail that wags the dog.  And, it’s especially easy to do amidst a low-volume holiday week – a very common occurrence.

There are three primary factors which can readily cause stocks to rally: a decline in VIX, a rally in USDJPY, and a rally in oil prices.  All of these factors were instrumental in getting SPX up to 2940.  And, all were in the process of unraveling over the past several weeks.

Yesterday, they all recovered.

First, here’s what the S&P 500 e-minis (ES) looked like.  Note the labeled reversal points.The first factor was oil, which saw a channel which dates back to Feb 11, 2016 break down on Monday. It closed below the channel bottom – quite bearish.Yesterday, it recovered sharply — rallying 10.95% from Monday’s lows.  Note that it bottomed where ES did at “1”, pulled back a bit at “2” when ES backtested its SMA5 200 (a frequent support level for algorithms), and didn’t let up until it reached “3” at the same time as ES.The second was VIX, which on Monday had closed above the .618 Fibonacci retracement of the drop from 50.3 in February to 10.17 in August.  This was a potential turning point. So, the fact that it closed above the .618 on Monday was quite bearish.Despite having closed above the .618 (point 1), it dipped below it and broke below the rising purple trend line at exactly the same time that ES first climbed above its SMA5 200.  It backtested the TL when ES backtested its SMA5 200 (point 2) and plunged 18.3% over the next 6 hours — conveniently bottoming out (after breaking below the red TL as well) at the close (point 3.)

The last factor was USDJPY, which had closed below its SMA200 on Monday — again, bearish.  Yesterday, it had worked its way below the .886 again prior to the market opening, then sharply recovered by the time the market closed.  As with the others, its inflection points exactly matched those of ES.

The big question on everyone’s mind is whether the correction is over.  Have we avoided a bear market?  Our charts have shown that lower lows would come ideally in February or even March.

The fact that stocks were falling so sharply produced incongruities between Fib levels and channel bottoms that were going to be messy to resolve.  This bounce, however long it lasts, might have taken care of that little problem.  We’ll find out soon enough, as futures are currently off about 40 points and didn’t make it back into the rising channel from which they broke down last week.

I’m still on vacation, but will check in later in the session.  A reminder for members and lurkers alike…our sale on Annual Memberships draws to a close in a few days.  I suspect this will be the last time we offer them.  But, regardless, the price is right — equal to about 5 months on the monthly subscription plan.  For details and to sign up now, CLICK HERE.

GLTA.

 

 

 

When we last focused on bonds back in October [see: Plan B] we noted that 2s10s spreads were collapsing and 10Y prices (ZN) had reached important support.

Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy.  Bottom line, they aren’t good.

This followed a supposed “breakout” in yields that we never bought.  Even as nearly everyone around us called for 3.5 – 4% yields, we saw them falling from 3.24% back to our 2.85% target — which is exactly what happened.

Since then, ZN has rallied sharply, reaching our 121 target last week and threatening higher.  And, 10Y yields have broken below a trend line dating back to July 2016.We’ll take a look at the road ahead.

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As we noted last week, the top of the purple falling wedge is also the midline of a falling (gray) channel — providing a potential breakout in price with solid, potential targets.

Looking at the bigger picture, we can see that ZN is also backtesting a flat, gray flag pattern dating back to 2012.  When it broke down earlier this year, it opened the door to a tag of the large, white channel bottom.

Meanwhile, the breakdown in yields provides solid potential lower targets, with the falling yellow channel .786 at 2.492 looking like the first important test.If it fails, as expected, there are many lower targets that come into play.The price chart provides some targets that fit: 123 for the 2.498 target, 127 for the 2.172 target. The chart below shows potential timing via a recently added falling white channel.Obviously, the above requires yields to continue breaking down and price to break out — a scenario I’ve favored for a long time.  I have never bought into the idea of yields breaking out, simply because I don’t believe the Fed would allow it.  It would be much too onerous from a budget standpoint.

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Wishing everyone a very, Merry Christmas and a New Year of peace and prosperity.

Watching this administration operate the markets, I sometimes get the feeling they’re trying to throw the game.  Witness Mnuchin’s bizarre announcement that everything is fine, there are no liquidity issues, I’m going to convene the PPT just for the heck of it.

It’s akin to bursting into a crowded theater and screaming “don’t worry, there’s no fire!”  Sure, some might reach for another handful of popcorn.  Wouldn’t you at least look around and sniff the air more carefully?  Maybe a few of us would even make our way toward the exits — just to be on the safe side.

Futures are currently off 14 points on what might otherwise have been a typical maintenance-mode Christmas Eve.But, that’s not the problem.  After reaching our latest downside target on Friday, SPX closed below support.  And, this morning, USDJPY and TNX have broken down.  VIX, which already broke out last week, is threatening another breakout.  This is no way to run a rescue operation.

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Thus, equities are likely to continue to our next lower targets.  ES’ falling white channel has broken down and the smaller red one might well follow suit.

SPX’s falling white channel has been expanded so many times, it no longer makes any sense.  As I wrote a couple of weeks ago, this is looking more and more like a 2011-style breakdown.

VIX has potential resistance here at the red channel top, but the white channel top and the .618 and .786 Fibs present an easy alternative since last week’s breakout.

It’s also worth keeping an eye on COMP, which has very nearly reached our next downside target… …and AAPL, which is only 4 points away from our 144.48 target in pre-market trading.

A bounce by either, or both, could do wonders for the broader market — especially if the PPT takes concrete action (e.g. whacks VIX.)

The currency picture.  USDJPY is heading toward its .886 at 110.31.  If it doesn’t bounce there, we’re likely headed for 108.46, the 1.272 and a backtest of the broken gray channel.

EURUSD continues sideways, with the SMA200 in easy striking distance.

And, DXY continues to do a lot of nothing……even though TNX has clearly broken down.

Even oil and gas are getting in on the bearish action with breakdowns of the more orderly path they might have taken to our next downside targets.

I intend to post updates to bonds, gold and maybe a few others later today — probably after the 1pm close.

GLTA.

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Lots of targets were reached yesterday.  USDJPY reached our downside target at its SMA200.VIX reached our next upside target at the .500 Fib.Gold reached our next upside target. ZN reached our next upside target.And, CL reached our next downside target at the .618 Fib.With so many key levels being reached, it’s not surprising that SPX reached our next downside target and got a nice bounce.  The question is whether it’ll hold.

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The doves are up in arms, incensed that the Fed would dare raise rates (and more to come!) in the midst of an economic downturn.  Never mind that most of these doves were the ones pounding the table last week about how wonderful the economy is.

Are they right?  Yes.  And, no.  Here’s why.

When the Fed first started talking about needing to aggressively raise rates, inflation was a problem.  Interest rates were spiking higher which, with $22 trillion in debt and a massive budget deficit, would sink the economy that much faster.

But, the White House got the message and started working to push inflation lower.  First came the tweets, which didn’t help at all.  These were no doubt followed by back room negotiations, which also didn’t help.

Finally, Jamal Khashoggi had the bad fortune to be butchered by the Saudis.  In the face of international outrage, Trump finally had some leverage. He could protect MBS and friends; but, it would cost them.  Beginning the very day that Khashoggi was killed, WTI and RB plunged over 40%. CPI followed suit, but not in time. Because the YoY delta in gas prices will be negative in December, CPI might very well decline below 2%.  But, it won’t be reported until January.It was enough to make the Fed eliminate one 2019 rate hike, but not enough to forestall yesterday’s rate hike or assuage the doves regarding the path forward.

If CPI comes in at 1.9% in January, the Fed can say “look, no more rate hikes for a while ’cause we’re data dependent.”  The doves will love that.  But, it’s too late for 2018.

On another note, I heard someone on CNBC this morning say that it was wonderful that the US dollar was declining, as if this was a good thing for the markets.  Obviously, this person doesn’t look at charts, or at least the USDJPY chart.

As expected, the pair is plunging toward its SMA200 — with the usual impact on stocks.

More bad news for bulls: VIX, which has toyed since Oct 11 with a fan line off its Feb highs, is seemingly breaking out.

Our downside targets remain unchanged.

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