I have long looked at interest rates, inflation and politics as at least as important as supply and demand in forecasting oil and gas prices.  After July’s 2.95% CPI print and subsequent spike in interest rates, it seemed obvious that the Fed faced a dilemma.  From Currency Crisis on the Horizon:

…the rise of inflation — caused primarily by rising oil and gas prices — is a problem. If oil and gas prices decline, inflation is reduced by quite a bit. But, the latest rally in stocks was greatly bolstered by the breakout in oil and gas. If the breakout goes away, would the rally?

Oil dropped nicely over the next week, but began a sharp rally that lasted from from mid-Aug to early October.  Gas put in another leg lower through Sep 6 before joining in the rally. Sure enough, stocks responded positively.  SPX gained 5%. But, the 10Y soared from 2.80 to 3.25%.  Ouch.

It was obvious that oil and gas needed to come back down lest inflation and interest rates get out of control.  CL (WTI futures) reached 76.9 and RB (gasoline futures) 2.15 on Oct 3 when we pulled the plug in VIX Takes The Plunge:

…CL and RB, which not only reached overhead resistance by our measure, but must deal with 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 tight stops in case this is a head fake.

We delved further into motives on Oct 16 in Appearances:

…since Trump is desperate to reverse the rise in gas prices, inflation, and interest rates between now and November 6 (and, to salvage billions in arms sales) don’t be surprised if we get that next leg down in oil prices very soon.

And, a few days later in Oil & Gas Come Through Again:

While baffling those who focus on fundamentals and various geopolitical risks, these price moves made perfect sense when viewed through our favored prism: “what do TPTB need them to do?”

That equation, my friends, boils down to a few essential elements: inflation, stock market support, politics and chart patterns.  We know the administration craves lower inflation and interest rates and has been agitating for lower oil prices in order to accomplish this.

The following week, I added our current lower targets for oil in Time to Panic and gas in Interesting Days Ahead.  And, in Coincidences and Consequences, I touched on how the Khashoggi murder likely played a role in Saudi Arabia’s sudden acquiescence.

It’s interesting how Khashoggi’s murder top-ticked oil and gas prices – and, so soon after Trump’s latest demand that OPEC lower oil prices.

I’ve received more than a few sideways glances over the past month, especially from those focused solely on fundamentals who felt it was ludicrous to suggest that Trump might be manipulating oil and gas prices in order to achieve his political goals.

Yesterday, Trump came to my defense.

“If you look at oil prices they’ve come down very substantially over the last couple of months,” Trump said. “That’s because of me. Because you have a monopoly called OPEC, and I don’t like that monopoly.”

Translated: “Voters were becoming increasingly agitated about soaring gas prices and I needed to get them back down prior to the midterm elections.  I’d also like some ammunition at my disposal to keep a lid on further FOMC rate hikes.”

Touting his success in bringing prices down, of course, is specious at best.  Current WTI prices are actually higher than they were before Trump’s “provocative actions” response to the February Israeli-Syria-Iran conflict laid the groundwork for his subsequent withdrawal from the JCPOA which sent prices soaring.

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CL and RB have reached every downside target we’ve set for them so far, with one potential last leg down looking fairly likely.  Our Oct 3 short call has produced a 20.5% gain in CL and 23.7% in RB.

But, my point isn’t to toot my own horn — though we have enjoyed a string of nice results [OIL and GAS].

I simply think it would be wise for analysts to consider central bankers’ and politicians’ objectives whilst laying out their forecasts.

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VIX is still sitting just above its SMA200, so we’ll know soon enough whether or not stocks have topped out. USDJPY continues ramping higher.As such, stocks are in limbo – waiting to hear what the Fed has to say, which could potentially be damaging, but with the usual downside protection.   Note that even COMP is sitting atop its SMA200.I have to run out for a meeting, will post more later.

UPDATE:  2:00 PM

The FOMC statement…

UPDATE:  2:45 PM

Nice downturn, so far.  VIX is bouncing, so this reversal might have legs. UPDATE:  3:20 PM

I suppose the minutes weren’t dovish enough.  TNX, DXY and USDJPY are pushing higher…

…while EURUSD is headed lower.ES and SPX are still clinging to 2800. And, interestingly, COMP is back below its SMA200. If we can just get a nice bounce of of VIX’s SMA200, we should see SPX back down to its SMA200.  Again, if it can’t hold, we have a slew of targets ranging from 2600 to 2703 that would align nicely with our COMP target.  More on this later.CL is soldiering on toward our downside target. When it stops, RB should too. The latest catalyst is almost laughable.  Now, Saudi Arabia is considering disbanding OPEC.  Riiiiight.

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Baffled by soaring futures in the wake of an election which ushered in gridlock?  Don’t be.  As we witnessed after Brexit and the US election in 2016, algos were easily driven higher by VIX and USDJPY.  Last night was no exception.

USDJPY, which had dropped below its latest straw man TL, suddenly reversed and spiked higher exactly at the same time that ES dropped through its yellow channel midline.  Only after ES pushed through its SMA200 did USDJPY settle back down.Likewise, VIX dumped below its horizontal resistance just in time to ensure a big, green opening. Oil futures even got in on the action, just for good measure.  Following a very bearish API inventory report, CL spiked higher anyways.  The net result: ES is not only higher but is accelerating higher and will easily allow SPX to gap above its SMA200 on the open. With ES’ and SPX’s 2.24s and SMA200’s behind them, is the coast clear for equities?  Hardly.

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Futures are off modestly on an important election day which will hopefully resolve plenty of unknowns.On the bullish side of the aisle: both ES and SPX are safely above and have backtested their 2.24 Fib extensions; oil and gas have fallen sharply to decent support levels; VIX is at a modest level with a clear path lower if necessary; USDJPY has a clear path higher – at least temporarily.

On the bearish side of the aisle: inflation should be much lower in Oct as a result of oil and gas declines; interest rates are still pushing against important resistance; VIX experienced a golden cross on Friday; FAANGs are providing bearish leadership; and, many fundamental analysts have pronounced a democratic surge as bearish.

Both sides have played to their bases in this midterm.  In several cases, this has resulted in excellent results for our forecasts.  Consider, for instance, how much gas prices have dropped — mitigating the damage done by Trump’s Iran sanctions and helping our oil/gas forecasts working out quite nicely.The assistance provided by currency moves has played nicely into our USDJPY forecast.As we learned after the 2016 election, the market moves the way the algos dictate.  The only question is whether the algos will receive enough “guidance” to keep stocks on the rise. It should be an interesting next couple of days.

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Three months after AAPL’s “breakout,” it faces its first real test.  As we discussed in August [see: Engineering AAPL’s Breakout] the stock burst out of a long-term rising channel with the aid of several well-timed increases in its stock repurchase program.

Now, it’s time to backtest that mediocre 12%-per-year channel it’s been in since 2010 and embrace its new and improved 36%-per-year channel.A drop to 200 or so wouldn’t do much to dent bulls’ enthusiasm.  Even a likely drop to the SMA200, currently at 192.17, could be passed off as a base-building exercise. One key number in the middle is the open gap remaining at 195.96, a gap which would obviously be closed with a tag on the SMA200 and red channel bottom.All of these scenarios presuppose that, like many of its FAANG cohorts, AAPL will disappoint at least a little. Clearly, the company could turn out some great numbers. But, with the market’s ongoing rally depending on AAPL’s results, anything more than a minor disappointment could do some real damage.

Bears probably shouldn’t get too worked up.  Even if there were a disappointing number of people willing to shell out $1,500 for a fancier way of posting on Instagram or playing Fortnite, the company could always expand their buyback program by another $100-200 billion.

If the SMA200 doesn’t hold, AAPL will have some important decisions to make re buybacks.  The next significant support is way down at 144.48.

Stay tuned.

 

 

 

 

 

 

 

 

 

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The death cross is one of those tried and true technical indicators that often portends big drops.  When a stock’s 50-DMA drops below its 200-DMA, it tends to drop like a rock (unless it’s FB, which uses such crosses to time its buyback announcements.)

I thought it’d be interesting to look at VIX, which has had such an important impact on stocks — especially over the last two years. Previous death crosses (when it’s 50-DMA rises above its 200-DMA) are marked with a yellow arrow, and it’s pretty clear that they have predictably indicated big spikes in VIX — and, big drops in SPX.It’s interesting, then, that as of yesterday’s close the 50-DMA and 200-DMA were both at 15.97.  This morning, the 50-DMA ticked slightly higher — making this the most bearish chart I know of.continued for members… (more…)

VIX’s rising TL has been a solid guide to lower stock prices.  This morning it is indicating another, more serious breakdown than the head fake we saw on Monday.Along with USDJPY’s “breakout” it has been enough for the algos to bid futures up to the top of their falling channel for the 10th time this month.

There are two ways to look at this.  One is very bullish, while the other is quite bearish.  It’s decision time for stocks.

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You know the market is in trouble when USDJPY ramps in the hours before the open and futures tumble into the red anyways.If you’re wondering why the BoJ picked this particular moment for USDJPY to break out, look no further than the NKD.  After guiding NKD higher for over 10 years, it doesn’t seem likely they’ll just roll over at this point.This on the heels of a pretty wild ride, yesterday.  SPX spiked up to slightly above our upside target and then got whacked, plunging 103 points from its highs before bouncing into the close.

In the process, SPX formed the right shoulder we were expecting — which opens the door to a much bigger drop than was originally the case.The algo backdrop is negative this morning, with VIX still above its key trend line and RB and CL dropping toward our next downside targets.  Stocks could be in for another rough day.  What if this is the day?

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SPX bounced right in between the two .786 retracements we had identified Friday – leaving it either on the road to recovery or in the midst of forming a right shoulder in a Head & Shoulder pattern.

Again, we should keep an eye on VIX – which is threatening to break down after an extended rally.continued for members… (more…)