The great thing about studying how algos dominate the equity markets is that, if you look very carefully, you can see the gears and levers working in the background. In this morning’s pre-market, we can see a number of factors sliding into place which are designed to stop the market’s bleeding.

First, VIX reached our topmost price target of 45.73 overnight. This represents very significant overhead resistance and should be met with heavy selling pressure. It’s a very logical place for central bankers to take a stand if they hope to support stocks.

Next, USDJPY has almost reached our SMA200 target. After its failed breakout, this would be a logical place for the BoJ to attempt to take a stand……which, combined with EURUSD reaching our next upside target……should allow DXY to get a nice bounce here at our downside target.CL has also reached our downside target, transitioning from one channel to another less steep channel and beginning an extended bounce which will ultimately result in a tremendous downturn. But, for now, it’s an important place for OPEC et al to take a strong stand.And, last, the 10Y is bumping up against our highest targets (for this cycle.) A move above 135’155 would unleash another torrent of selling.  It’s a very good place to take a stand……especially as 2Y yields have reached our 0.95% target.There are countless other “tells” I could detail – none of which guarantee that the current decline is over – only that a concerted effort is being made to prevent SPX from falling below important support levels to our favorite target at 2703.62.

ES fell below its September 2018 highs (2947) overnight, but is bouncing. The logical implication is that SPX’s Sep 2018 high of 2939.86 will be defended. If it fails, then the 13.3% correction will almost certainly turn into a 20% correction.

This correction seems to have many investors flummoxed. It shouldn’t. By simply paying attention to the charts, these moves can be anticipated. As we noted on the 18th, two sessions before the top:

…be very careful in chasing this breakout. It is built on a very weak algo-driven foundation which, given the coming moves in CL, DXY, USDJPY and TNX, cannot stand. When it cracks, it could be quite violent.

And, on Buckle Up posted on the 20th:

The coronavirus is the wild card, of course. It has the potential to blow all of the above provisions out of the water – starting with the currency and bond picture. A flight to safety which sends ES back below 3336.49 is a clear sell signal.

And, from Just When You Thought it Was Safe on the 21st when we got sell signals from DXY, CL, the 10Y, the 2Y, 2s10s, EURUSD and gold:

ES just tagged 3336.25 – time to bounce if it’s going to. Remember, if it doesn’t bounce, SPX’s 1.618 is way down at 3306.51. And, if these 1.618 extensions don’t hold, it could be game over for stocks.

This is the daily chart posted that day…

…and where we are as of yesterday’s close.The problem with taking a stand, of course, is that markets are now dominated by algos and an assortment of trend-following robo-investors. These are the very dynamics which made the never-ending rally possible. They now make it very difficult for stocks to find support.

Sunday is the last day of our membership promotion – an opportunity to get a a handle on what to expect before it happens and save a few bucks at the same time. For details and to sign up now, CLICK HERE.

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Everything’s falling into place now, with ES almost to its SMA200 and SPX sure to follow.

This is a much better bounce spot (if there’s going to be a bounce) because, as we discussed several weeks ago, it also represents SPX’s 2.618 Fib extension.

Meanwhile, the 10Y and 30Y are threatening breakdowns.  ZN, having reached our 113’180 target yesterday, is hinting at a test of its former highs. And, TYX appears to be dropping through the bottom of a channel from 2011. And, CL has just about reached our most consequential downside target from many months ago.Bottom line, this is critical support for both bonds and equities.

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A reminder: There are still 3 days left on our membership promotion: a $100 discount on the first quarter of a Quarterly Subscription and an $80 discount on the first month of a Monthly Subscription. Former Annual Subscriber? Contact us to to inquire about renewing at your previous rate. For details and to sign up: CLICK HERE.

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Six weeks ago we looked at the unsustainable relationship between interest rates, inflation, oil and gas prices and stock prices. A few of the charts from Bonds: More Turmoil Ahead turned out to be quite prescient.

We expected the 10Y, then at 1.85%, to reach and drop below its all-time lows at 1.34%. It did so yesterday.We also forecast oil and gas, then at 59 and 1.65 respectively, to drop to at least 51.62 and 1.42. CL is currently at 49.66 and RB reached as low as 1.43.We suggested that VIX, then at 12.8, was due for a nice bounce with targets ranging from 16.97 to 34.97. Yesterday, it reached 30.25. We looked for the Dow, then at 28823, to drop back and test its SMA200, then at 26833.  Yesterday, it slipped slightly below its (now higher) SMA200 and reached 26997.And, we looked for S&P futures, then at 3272, to test 3336 before reversing to 3190 and, if the absence of a bounce, to drop to 3076.  They climbed to 3397 before finally reversing and reached 3091 yesterday.The key to the accuracy of all these forecasts and others was the observation that oil and gas prices were not compatible with the then-current interest rates and would need to fall sharply in order to maintain an accommodative monetary policy.

CPI came in on target the following morning, and the divergences are in the process of being “ironed out.”  Our long-term forecast and cycle study for TNX has more than proved its worth.  What is it saying now that rates have dropped to all-time lows?

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In light of the selloff which has caught so many mainstream pundits off guard, we are offering a $100 discount on the first quarter of a Quarterly Subscription and an $80 discount on the first month of a Monthly Subscription. Former Annual Subscribers, contact us to to inquire about renewing at your previous rate. For details and to sign up: CLICK HERE.

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There’s a lot going on this morning. S&P futures were off as much as 97 points earlier……nailing our downside target from Feb 14 [see: A New Day, Same Old Nonsense.]

As we discussed then (and just about every day since then):

The big picture for stocks hasn’t changed. There are upside targets which have opened up as the result of “breakouts,” but IMO the breakouts are bogus. So, I’m expecting more downside…

Central bankers will certainly do their best to contain the damage the coronavirus is doing to markets. But, it remains to be seen whether the usual gimmicks will be up to the task, especially if the virus grows at the same rate as Italy with cases and deaths doubling every few days.

Even though the US has relatively few cases, it’s only a matter of time before the coronavirus affects every single person in the US. My projections indicate we’ll see over 500 deaths within the next month. How many businesses will remain open?

Can Bullard’s and Buffet’s cheerleading on CNBC possibly be enough to offset the most serious threat to the global economy in the past 20 years?  I seriously doubt it.

Other targets tagged this morning include VIX……which has tagged our 23.28 target from Jan 27 [see: More Where That Came From.]  Remember it was our daily VIX chart which suggested that this downturn would likely arrive in late February.

And, perhaps most alarming, the 10Y has dropped through our 14.50 target – not to mention its Sep 2019 lows. Our forecast ultimately calls for much lower lows, but the lack of even a bounce here at 14.29 should trigger additional selling from the algos.

If ZN breaks out past our 133’040 target from last year, things could get very ugly very quickly.

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Futures made a valiant effort to recover yesterday’s losses, even climbing back above the 10-day moving average by the close after coming within a few points of our 3336.50 target.

But, the selloff continued overnight, with ES shedding about 30 points from the close before beginning the obligatory recovery as the open approaches, egged on by soothing comments from CNBC’s guest host James Bullard, who has a distinguished history of appearing whenever TSHTF. From all appearances, even the machines are starting to take seriously the potential for the coronavirus to evolve into a global pandemic.

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Algos have been given the green light by VIX, oil and especially currencies – which present an incredibly bullish picture courtesy of a signal which hasn’t failed in at least 20 years. But, the coronavirus is a different kind of threat with enormous implications. USDJPY’s improbable breakout smacks of desperation. Will the algos really behave themselves and get with the program or is this just another head fake to distract from the huge correction the bond market says is right around the corner?Buckle up.

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PPI increased by 2.1% YoY in January, the sharpest increase in 15 months. The monthly increase of 0.5% strongly outpaced expectations of 0.2%. Most of the commentary attributes the beat to transitory trade factors. Yet even core PPI increased at 1.5% YoY.

Futures initially slipped about 1 point on the news, then settled higher, paced by a vitally important breakout in USDJPY. DXY is also threatening new highs as EURUSD tagged our next lowest and most important downside target in years. Yes, this is one of those kitchen sink moments.

I suppose in a logic-based economy a PPI print such as this would diminish expectations of further CB easing. But, that ship sailed a long time ago. The latest numbers I’ve seen call for 60% odds of further rate cuts in July.

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It’s a strange phenomenon: the more serious the coronavirus threat, the more strenuous the efforts to prop up stocks. After headlines such as those below, the market has no business being in positive territory.

Yet, here we are, with ES up 6.50 points.  VIX is actually off.  Sheer lunacy.Likewise, oil and gas are rallying as though the EIA, API and OPEC hadn’t all downgraded their demand estimates.

Will the market take any of this information to heart, or will we get the usual holiday weekend gap higher?

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