When markets are propped up for an extended period of time, the risk doesn’t go away.  In fact, the postponement increases the tension such that the unwinding — the eventual return to stasis — is often more violent than would otherwise have been the case.

With the US elections only a week away, we have to wonder what the unwinding will look like this time.  Combined with a changing of the guard in carry trade leadership, the next week should be quite interesting.

We got a taste on Friday, when SPX nailed each of our downside targets — just, with a 14-pt rally thrown in the mix.

SPX appears to have broken down.  The obvious levels to watch are the red .618 at 2130, the white midline at 2126, and then the red .786 and .886 at 2123 and 2119.

Kudos to anyone who had the nerve to hang on to our initial short position.  We remain short from 2139.23 on Oct 27 [see: Distress Call.]

continued for members…Today, we should see more of the same — lots of volatility and plenty of head fakes.  USDJPY threatens to break out of its breakout.

ES reached the .886 on Friday, which is probably enough for the downside for the moment. However, there’s a very good argument for lower – particularly if CL continues to break down — which it should.  Our argument in Welcome to Peak Oil still holds.At present, CL’s dipping below the yellow neckline and the rising white channel bottom and is likely headed for the SMA100 and white .618 at 46.56.Can USDJPY continue to ramp higher to compensate?  I believe they’ll try, with 107.10 my favored target between now and Nov 9.But, it’s anyone’s guess whether it’ll be enough.  The wildcard is that the BoJ is meeting today and tomorrow.  They could easily tilt the table, as they’ve done many times before.

The most likely pattern for the next week is a triangle — which represents a buildup of tensions, a coiling if you will.  Throw in the uncertainty of the election and its potential effect on the Fed’s effectiveness, and the next week is basically a crap shoot.

But, again, the charts favor a sell off.  My favorite targets are ES 2080 and 2065 — about 2-3% lower.  SPX is a little different, with 2090 and 2068 by Nov 8 the most appealing (and interim targets at 2103 and 2093.)  Note that these are the same targets that have been in place since Oct 13 [see: More Trouble for Mr Market.]

Trade safe.