ES managed to hold those higher lows yesterday, bouncing 46 points from its 4am daily low. Both SPX and ES managed to close well above their SMA10s again.
The usual factors were at play. At one point, VIX was off by 18.4%. But, the real action came when, as we discussed, VIX dropped through TL and SMA200 support. The algos are still very much in charge and haven’t yet been given the green light for a meaningful backtest.
Could it come today?
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Not too surprisingly, the Iran problem didn’t go away over the weekend. If anything, both sides are making threats that would significantly expand the conflict. What’s more, Trump’s unilateral actions have resulted in Iraq’s parliament calling for all US troops to withdraw from Iraq – without question an important win for Iran.
Trump’s 2011 predictions of a politically-motivated attack on Iran by Obama (which obviously never came to pass) are causing many to question the timing and motivation of his own actions, not to mention the existence of a coherent Middle East strategy.
So far, equities’ reaction has been contained. Though, gold and bonds are providing a less filtered reaction to the escalating risks. Gold popped up to tag our next upside target…
…and, 10Y notes broke out.
Past Trump-related emergencies (trade war, impeachment, etc.) have been easily downplayed or explained away. I can’t imagine that Trump or his sycophants will be able to spin this latest series of missteps as unimportant.
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WTI futures spiked nearly 5% overnight in the wake of a US drone strike on Baghdad Airport which killed Iranian military commander Qasem Soleimani. It is a dangerous escalation in the US conflict with Iran which broadened when Trump alarmed US allies by pulling out of the Iran nuclear deal last May.
We argued at the time, as did many, that Trump’s actions put the US on the path to a potential shooting war. The assassination of Soleimani clearly amplifies the risks. So far, oil prices have pushed only slightly above the levels reached after the nuclear deal pullout and the Saudi Aramco plant was attacked in September. But, this is obviously a more serious geopolitical development. 
From an economic standpoint, a sharp rise in the price of oil further complicates the already thorny inflation problem facing markets – setting up a showdown between Fed hawks and doves in January.
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In our Aug 28, 2019 Update on Gold I noted that although GC had just reached our 1560 target, ZN had also reached our 132’100 target. The picture was further muddled by the fact that DXY and GC had been moving in unison – an unusual occurrence, to say the least.
ZN’s resistance could put the brakes on, meaning rates would rise and GC would theoretically fall. But…I expect ZN’s pullback to be modest — possibly only 3-4% — suggesting GC’s pullback would also be fairly modest.
As it turned out, GC and ZN both reversed. Although DXY made a half-hearted effort to break out, it was limited to 1.5% and GC’s reversal was limited to 1446.
DXY’s rally stopped making any sense at all once FOMC members began hinting at additional rate cuts. When the Fed resumed QE (QE-not as we like to call it), the market knew what to do: DXY has been steadily selling off and GC has climbed back to within $30 of its August highs.
Does this mean more upside ahead?
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With futures up 18 points and the S&P 500 closing 17.37 points below last week’s all-time highs, we should know pretty quickly which way the winds will blow today. As is often the case, VIX has been driving the algos with shots across the bow as needed — three so far. It’s enough to establish an obvious trend line which could easily be broken.
We got the test of the SMA200 we expected on Friday, and the subsequent very precise test of the red channel bottom from Nov 2017 at 8AM this morning. At this time, however, the key will be whether that little red TL from the overnight lows can hold.
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