Investors got a taste of reality yesterday, and it was a little scary. Whether COVID, inflation, tapering or just plain exhaustion from the constant meltup, markets remain very overdue for at least a pause. The charts suggest it will be significant.
Of course, with ES holding its new, higher 10-day moving average overnight, we’re supposed to believe everything will be okay. Stay tuned.
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One of my favorite childhood memories was playing Gin Rummy with my grandfather who, whenever he caught me with way too many cards in my hand, gleefully cried out “timber!”
With seemingly everybody long equities and very few of them bothering with protection, this morning’s downturn has that kind of panicky feel. Sixty points on ES is a lot. The reality is it could be much more if some of the algo drivers currently hanging by a thread break down. Our favored targets are much lower.
I’m especially interested in the 10Y futures, which are nearing our upside target this morning…
…and USDJPY, which finally broke down after six months of central bank coordinated, stock-propping, ramp jobs.
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The 10Y tagged our next downside (yellow) target yesterday, the trend line from the Aug 2020 lows, trading as low as 1.352%. In reaching those lows, it actually broke below both the trend line and the bottom of the falling white channel it’s been locked in since mid-March.
This target has been on our radar since March, when we plotted it in anticipation of a blowout April CPI print. We got the print (4.16%) but the market’s downturn was limited and short-lived, resulting in a gentler, more carefully governed decline than we originally anticipated.
Yesterday, however, the decline turned into a breakdown. Today, we’ll discuss the implications.
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Stocks rarely drop over a 3-day weekend. This one was no exception. The miniscule decline we saw in the futures last night has been all but erased despite a conciliatory 5% bump in VIX to backtest its SMA10. No fuss, no muss.
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As we noted yesterday, EURUSD is finally fulfilling our expectation of a breakdown from the trend established at the Mar 2020 lows. This move has been a long time coming and has potentially significant consequences for the DXY.
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In a market where VIX’s every twitch can send stocks screaming higher (and, in the old days, lower) the most important chart is this one. A breakdown below the dashed line would be just as supportive for stocks as was the breakdown in late 2016.
A close second is this one, showing yesterday’s bearish (bullish for stocks) 10/20 cross. Algos love these technical signals to go all in.
WTI ranks 3rd only because higher inflation is finally being considered problematic. A breakout here would still have important implications for stocks.
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Stocks are off slightly as the 2nd quarter draws to a close. The next quarter? I’ll be watching to see whether or not VIX experiences a bearish (bullish for stocks) 10/20 cross.
Equally important: can ES really maintain its bullish 10/20 cross indefinitely?
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Futures are melting up again on yet another pre-opening lower-low plunge by VIX.
With the other factors up against hard stops, all eyes continue to be on VIX – which has already spoiled the bears’ fun on numerous occasions.
The last one was this obvious backtest opportunity a couple of weeks ago. Everything was set up perfect for a backtest of SPX’s 3.618 extension…
…when VIX was unceremoniously crushed without even getting a crack at its SMA200.
It was clumsy and obvious…but effective.
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June 21 should have been the day we saw a bearish 10/20 cross in ES yielding a backtest of the 3.618 Fib extension.
Instead, we got one of those silly, algo-feeding collapses in VIX that sent stocks screaming to new all-time highs and ES has remained in a bullish 10/20 cross. With rising channels about to clear important Fib levels, the time to backtest some of that support is here and now. It’s not as crazy as it seems.
For whatever reason, VIX hasn’t yet experienced a bearish (bullish for stocks) 10/20 cross – something that nearly always happens before an equity rally. This suggests we might finally get the pop and drop we’ve been waiting for. 
Stay tuned…
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Of all the tools central bankers use to support stocks, VIX is perhaps the most useful. Frequently, a breakdown in VIX has been used to signal algos to push major indices above significant overhead resistance such as a major Fibonacci extension or channel top.
We last noted this phenomenon back in April when SPX was pushing up against its 3.618 Fib extension at 3956 [see: Irrational Exuberance and You.] Sure enough, VIX broke down through the falling purple trend line (#3 above) and SPX sliced through the resistance.
It’s significant because once again VIX faces an important test of support, the bottom of the channel from 2017. What it does here will determine whether or not the rally can continue.
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