In our last update on the Dow [see: Dec 11 Update] I mentioned that it was coming up on important support.

if DJIA should happen to plunge below its purple .886 at 23755, I’d sure want to be short.

As it turned out, we had less than a week to wait.  DJIA dropped through 23755 on Dec 17, and didn’t stop until it reached 21712 on the 26th — a drop of 8.6%.  Since then, it has recovered all of those losses and more.  Is the coast clear?

Maybe. But, it’s important to note that like SPX and COMP, it is backtesting a point of potentially strong resistance — the neckline of a large Head & Shoulder Pattern that never completely paid off.As we discussed back in December, if it can’t retake the neckline, things could get pretty ugly.

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Futures are off 7 points as we approach the open……up about 10 points from the overnight lows that saw VIX gap back above its SMA100.  While theoretically important, we often see these types of moves after hours — the sole purpose of which is to provide VIX an opportunity to break down the following morning.

Yesterday, SPX and ES both reached their H&S necklines and reversed, with ES’ rising wedge breaking down slightly.  Strike one, but still at bat.

Our yield curve model is still signaling danger ahead. And, rates look likely to dip much further in the coming weeks.

But, tomorrow is OPEX and this is a three day weekend.  We know from past experience that both of these events often result in gaps up over resistance.  So, it remains important to exercise caution in committing to directional trades.

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December 24 was a pivotal day. As we noted at the time, most of our downside targets, some from several months prior, were tagged [see: Throwing the Game.]

ES reached our H&S target.  So far, it has bounced 13.3%.Oil reached our 43.50 target and has bounced 25.8%.RBOB reached our 1.2603 target and has bounced 16.2%.AAPL has bounced 9.6% since reaching our 144.48 target.And, COMP reached our 6227 target and bounced 14.3%.VIX, which had broken out of a falling channel, spiked up to our 34.97 target on the 24th.Though, if you look closely, you can see that it was threatening another breakout — having slightly overshot its upside target just like CL, RB, AAPL and COMP had slightly overshot their downside targets.

More alarming, USDJPY and TNX had broken down below important support.  As we noted at the time: “this [was] no way to run a rescue operation.”

It was no surprise that Mnuchin chose that day to convene the President’s Working Group on Financial Markets – aka the Plunge Protection Team.

The PPT presumably can’t buy stocks directly.  But, they can direct the Fed’s trading arm to trade in futures, options, etc. which, in turn, trigger algos to purchase stocks. It’s a well-worn transmission mechanism that rarely fails.  Their primary objective was to magically transform VIX’s breakout into a breakdown. In the process of being crushed by 51%, VIX has engineered a record-breaking rebound.  SPX has rebounded 11.4% and is slated to reach its H&S neckline on the open this morning.

Algos, which were greatly disparaged for driving the market lower in December, have – to my knowledge – received no criticism whatsoever for the rebound.

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The rising wedge we’ve been watching develop has made no further progress, but has merely extended as we approach OPEX Friday.With so much riding on whether it breaks down or breaks out, we’ll take a look at the big picture.  One thing’s for sure: the next move will be measured in hundreds of points.

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S&P futures came to within 20 points of the neckline of the H&S which nicely forecast December’s 300-pt plunge before finally taking a rest last night.

Yet, as the charts indicate, the latest drop has (so far) merely tested the bottom of a rising wedge. Should ES bounce from these levels, the upside case remains intact. Even a drop to the SMA10 would merely establish a less aggressive rising channel.It’s only when ES drops through its SMA10 that real trouble arises.

With CL and RB rolling over as expected and VIX backtesting the TL it just broke below, stocks are once again in a precarious position.

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As expected, CPI came in below 2% this morning. At 1.9%, it has clearly reached the level at which the Fed would have a tougher time justifying additional rate hikes.Futures, which were already off a few points, are settling lower.

The question now shifts to whether inflation is too low – especially given the much touted strong wage growth and tight employment conditions.

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We’ve had a nice bounce in most of our charts since reaching downside targets. AAPL has risen a decent 7% since reaching our 144.48 target on Jan 3. COMP has spiked a more impressive 12.2% since slightly overshooting our 6222.48 target.   RB has recovered 14.7% since reaching 1.2603 and CL has spiked an impressive 22.2% since reaching our 43.46 target.

But, the most impressive of all is VIX, which at yesterday’s lows had moved 46% since reaching our 34.97 target on Dec 24.  Yesterday, VIX reached our 19.64 target, which places it squarely in the driver’s seat in terms of the overall market which, by all counts, is nearing an important inflection point.continued for members… (more…)

On December 24, the President’s Working Group on Financial Markets met “to discuss coordination efforts to assure normal market operations.”  Most people call the PWG the Plunge Protection Team.  Can you blame them?

ES rebounded 10.4% since then, and “all” it took was a carefully constructed 45% collapse in VIX.  As we approach our next upside target, we’ll take a look at the likely next steps.

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The algo-driven meltup continues, with ES currently showing a 24-pt gain primarily on the back of CL’s bounce off its SMA20 and VIX’s gradual asphyxiation.As ES approaches the neckline of the H&S Pattern it completed and paid off so handsomely, we’re left to wonder whether SPX will ever pay its off. continued for members.… (more…)

Following Friday’s algo-inspired spike, futures have been settling gradually lower. Over the past several hours, though, ES has rallied back into the green.  VIX continues to drive much of the action, ramping overnight just to have a place from which to dive the following morning. With CL and RB consolidating and the dollar under pressure, will it be enough to keep the rally going?

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