The dollar index, which has spent the past two months at lofty heights based on expectations of an eventual rate hike, broke through key support overnight on a dose of reality from, of all places, Fed President Williams.

This enabled USDJPY to finally tag our 99.96 target, which has resulted in a rare sell off in the futures.

Naturally, another Fed President (Dudley, this time) immediately grabbed a microphone to exclaim that a September rate hike is very much a possibility, and that “the market is underpricing rate hikes.”

Wouldn’t it just be easier if they’d announce where they’d like SPX to close this afternoon?

continued for members…

First, the big picture on DX.  It could be done, though the Fib picture argues for more downside.

USDJPY overshot our target, and is working its way back above the yellow channel bottom.

CL has reached our upside target.

All of this leaves SPX, which tried to break out yesterday, in a rare position of weakness at the top of the rising purple channel.  The smallest reversal we’ve seen from the channel top is 13 points.  

But, our downside target at the purple channel midline (and, white channel midline) at 2173-2174 looks more likely.  If that doesn’t hold, then our other downside targets at 2165 and then 2157 come into play.

Here’s a little cleaner look.UPDATE:  9:48 AM

USDJPY continues to rebound, providing a bounce for SPX at the red .618.  The bounce could easily reach the falling SMA5 10 now at 2185.34.

UPDATE:  10:07 AM

Here’s the SMA5 10, but a little shy of the red channel bottom which would be a stronger reversal point.  Note that USDJPY hasn’t yet tagged its SMA5 200, which would also be more convincing.  I think the bounce might continue a little higher, potentially to the SMA5 200 at 2187ish.  We’ll keep an eye on CL and USDJPY.

UPDATE:  1:27 PM

Making some progress, again.CL pushed a little higher, which delayed the next leg down. But, CL has run into the top of the falling white channel, so should face real selling pressure here.  They will no doubt have it break out at some point.  But, is preventing a H&S Pattern that send SPX down another 15-16 points — still in a rising channel — worth expending that much ammunition?  Probably not. USDJPY is trying to take a stand, but the red channel shown shouldn’t hold up.

UPDATE:  2:59 PM

SPX just popped back above the little neckline, the SMA5 10 and 20 and is testing the SMA5 50 — all on more CL ramping and VIX bashing.  I’ll be surprised if VIX, which is hanging by a thread, doesn’t drop here to the SMA20 at 12.24.  And, note that CL continues to make new highs.  Unless SPX reverses here right away, I’d close the short and pick it up on the way back down.

There’s a decent chance that SPX is headed for the red .886 (white dot) at the close, so as to line up with the purple midline.  But, they could also be trying to string it out until tomorrow morning.

UPDATE:  3:20 PM

The SMA5 10 has caught up with SPX, so the odds of an additional decline happening today just dropped by half.  Traders should consider covering the short, and reopening only if SPX drops through the neckline again, say 2181.14.  

If you’re a swing trader, I still think this pays off if you’re willing to hold short overnight.  Of course, the usual caveats apply.  And, odds are it’ll at least test the white channel top first.

UPDATE:  3:30 PM

So far, SPX has resisted the support offered by the SMA5 50. And, CL has dropped through support.  For those who intend to hold short overnight, I’d remain short here. Otherwise, cash probably makes sense.  

Again, I don’t think CL will break out at this point.  It’s not important enough.  With USDJPY and CL likely headed lower, I’d be comfortable staying short in a swing position.  Note that the SMA10 is at 2177, though ES’ is at 2175 — the equivalent of 2178ish on SPX.