Ordinarily, when a channel breaks down and is backtested, it means more downside. SPX nailed our backtest target yesterday.  And, sure enough, the futures are currently off about 12 points.Yet, we’ve seen way too many instances over the last couple of years where a backtest overshoots and the broken channel is rejoined after, say, VIX is crushed or WTI or USDJPY is ramped higher.

Indeed, VIX remains within striking distance of last week’s 11.25 lows and CL, which broke down overnight, is suddenly bouncing as we approach the open.With major currency moves still ahead of us, can this backtest hold or are we in for another of those V-shaped recoveries?

continued for members…

Note that the red channel, which was probably too steep in the first place, looks done.  IMO, this opens the door for the less aggressive white channel, whose midline SPX just tested, to take over.The white channel is nonsense in the grand scheme of things.  But, it does provide an avenue to a potential backtest of the white 1.618(s) and the SMA200.

If I were a central banker who was worried about valuations and wanted to pick a point at which SPX could blow off a little steam without getting carried away, 2335-2350 would be it.  But, to fit, it would need to happen in the next few sessions. Wouldn’t you know it…USDJPY and DX both have considerable downside ahead of them.

EURUSD is the weird cousin who just doesn’t fit in.UPDATE:  10:07 AM

We got the usual ramp into 10AM, where SPX backtested the SMA5 10.  From here, we should see it focus on the SMA5 200 as it reaches the gray midline around 2438.23.  Whether or not it bounces there will determine whether the backtest holds or not.EIA inventories are coming up at 10:30…  We’re still in a triangle, but the downside case has a lot going for it – not least, the fact that sub-45 oil would help keep inflation tame. UPDATE:  10:30 AM

UPDATE:  3:05 PM

EIA reported an inventory draw but a production and import increase. CL waffled before recovering to test the nearest overhead resistance – the top of the latest falling channel.  This has helped keep SPX’s slump under control, along with VIX threat to reverse at the top of a falling channel.

I’ve added an interim target at the red .283 at 2440.48, and shifted the other target to 2436.06, the intersection of the rising white channel and falling gray midline at the red .500.  Keep an eye on VIX, though, as it has created an opportunity to break SPX out of the small, falling white channel.

If the rising white channel should break down, we’d have support at 2430, 2421.62 and 2415.41.

UPDATE:  1:08 PM

At the close, SPX is off 8.47, VIX didn’t break down but is actually breaking out (a little) and CL didn’t break out.  USDJPY continues to slump as the lousy housing report gives the Fed little ammunition to raise rates.  We should see a continuation of this slump tomorrow, with Jackson Hole warming up.  I’ve restored the .618 target as originally drawn this morning. GLTA.