After 2 1/2 weeks of a steady, orderly decline, stocks are poised to break out this morning. Is it another head fake, or does it represent an actual shift in direction?
Fortunately, the algo factors offer some important clues. The critical price level to watch is ES 2844.
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Is this really, as Trump maintains, the “greatest economy ever?” Hardly. Sure, changes in the way that inflation and employment data are calculated/defined have allowed the government to report generally positive results. But, one needn’t dig far beneath the surface to realize that they not only don’t represent the real economy; they’re downright deceptive.
Because inflation data is baked into so much other economic data, it renders the whole lot of it suspect — not to mention inconvenient. Because inflation is vastly understated, some of the barometers that argue for dovish monetary policy are sending false messages. And, because unemployment is vastly understated, some of the barometers that argue for hawkish policy are sending false messages.
April advanced retail sales figures came in ugly.
The rest of the recent data wasn’t much better.
The market isn’t taking it well. S&P 500 futures are extending their losses and closing in on our key SMA200 target from Apr 30 [see: FOMC Endgame.]
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As we wait for the broader indices to do a little fine tuning, it’s worth taking a quick look at some of the more bearish developments that probably weren’t part of the script.
First, AAPL broke down below its SMA200 yesterday to tag our 182.85 target. This, in addition to the channel breakdown, leaves it in a very precarious position. Only a single channel line stands in between it and another big drop. The only bounce which could save it at this point would be all the way back up past 193.
Then there’s BA, whichh tagged our 337.46 target yesterday. This tested a very important trend line from Feb 11 2016 which, if broken, would open the door to a critically important test at 325.
There other individual stocks worth watching. But, these are the two which deserve special scrutiny.
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Though it is getting a little monotonous, I’ll never get tired of saying that we’re about to tag our next downside target.
The past two weeks of downside have been a great recruiting tool for chart patterns and this website in particular.
A note to prospective members…we’re currently offering auto-renew monthly subscriptions at half-off the first month. To sign up, CLICK HERE.
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SPX needed about 22 points downside to reach the support of its SMA50, a rising channel bottom, and a falling channel bottom. ES, which finally reached our 2655 target from last week [see FOMC: Endgame] is currently off 30 points.
At this rate, SPX will breach its support on the open, especially if USDJPY doesn’t bounce here at its new lows.
Is it time for bulls to get nervous?
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A little over a week ago, SPX pushed to new all-time highs. I had a hard time getting excited about the upside. From the Apr 29 update:
SPX has been melting up so long that I don’t think bears will rush for the exits if it tops 2940.91. In fact, we might see some selling come in if it’s taken as a marginal new high on a truncated 5th wave. Still, a move above the Sep highs is technically bullish. Trend followers will be compelled to go/stay long with the former highs as their stop. Personally, I would be very cautious in chasing it, keeping an eye out for rejection and shorting it if it drops back through 2940.
After giving up 100 points since the top, ES is again closing in on our next downside target — the intersection of two channel bottoms and the SMA50. 
Is this the end of the slide, or is there more to go?
This has been a very well-managed slide, with ES tagging the top and bottom of a clearly-defined channel nine times since then. While the talking heads sometimes get excited, the damage could have been much worse.
Consider BA, which is arguably in the fight of its life. Back on Mar 11, I charted the potential outcomes of the fallout from its MCAS disaster. The most obvious targets were the .500 Fib which would close a large gap at 369ish, the SMA200 at 358, and the .618 Fib at 351.12.
BA closed the gap easily enough, reaching 365.55 later that day. But, it took almost two months for it to finally tag the SMA200 — which it did yesterday. In fact, it even closed below the SMA200, suggesting that the .618 is also likely.
Since BA has a large and active share repurchase plan, I can venture a guess at who was keeping the stock afloat in the midst of some very unsettling headlines.
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Despite the ample support markets are receiving from the algos (witness yesterday’s knee jerk reaction to VIX’s smackdown) our yield curve model continues to sound the alarm for equities.
The only question is how long the delicate equilibrium can be maintained. 
Rates can decline for many reasons. When due to central bank easing, for example, stocks tick gleefully higher. When it’s a response to fear, on the other hand, we can expect additional equity market instability.
As the 10Y approaches our next downside target from Dec 26 [see: Update on Bonds] it would be wise to consider why rates are declining this time.
Of course, the decline has been postponed repeatedly over the past 4 1/2 months.
But, the bond market has a great memory. It isn’t as easily fooled as equities.
In other words, there’s more downside ahead for yields and stocks.
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It’s been 14 months since Trump tweeted that “trade wars are good and easy to win.” Since its close that day at 2691.25, SPX has ranged 608 points — from its Dec 26 low of 2346 to last week’s high of 2954.
We’re seen many factors play into that 608 point spread: countless breathless reports of an impending trade deal, a truly laughable GDP print, the FOMC’s humiliating retreat from normalization. The most impactful factor of all, however, was Mnuchin’s convening of the Plunge Protection Team.
Though the decisions made during that call — so important that the heads of the Fed, SEC, CFTC, FDIC and OCC were called away on Christmas eve — will remain shrouded in mystery (minutes are not released), the outcome was obvious: VIX was crushed by 70%.
Now that the narrative is fraying a bit, we’re seeing VIX regain some of its swagger. As a result, ES is tagging successive new downside targets.
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Probably not. Although WTI got a nice bounce off our SMA200 target…
…USDJPY’s initial pop above its SMA200 has quickly faded (again) and headed for lower lows…
…and SPX, after tagging our target at the channel midline, is set to run into resistance on the open.
VIX remains a wild card, as always. But, if its rising channel holds this morning’s test (13ish), it will soon be testing its SMA200 at 16.54, a 22% gain from current levels.
If the channel doesn’t hold (the usual state of affairs) then we’re in for more meltup — which would shock absolutely no one.
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