VIX has been spanked by over 14% since Friday afternoon, aiding a bounce in stocks that breaks plenty of chart pattern rules.  Yesterday, it did more than backtest the falling white channel.  It broke down, back into the channel overnight — all in order to ensure another gap higher today.

Combined with well-timed bounces in USDJPY and CL, we’ve seen backtests develop in SPX that would ordinarily mean a downturn.  It wouldn’t be such a big deal if they weren’t setting up in practically everything I chart.

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Our algo says there’s more upside, which isn’t hard to believe given the breakouts we’ve seen already.  The big test will come at the red channel top at 2270ish.  Though that presumes SPX can push back into the broken purple channel, which as of right now sits at about 2266.

The key will be whether or not CL can recover here at the purple channel bottom…

…and, USDJPY can continue to trend higher.And, of course, VIX pushing below its .618 and SMA20 at 12.36 would help a great deal.

Yesterday, SPX respected the purple channel, and fell back fairly dramatically.  If it does so again, today, its downside targets are the SMA10 at 2258.79, the gap close at 2257.32, and the SMA20 at 2252.70.

There’s no reason it can’t continue climbing along the bottom of the purple channel, which by Friday reaches 2280.  It will depend on the algos, which are pretty much the only thing keeping stocks going right now.  Our analog’s upside target remains 2298.

UPDATE:  9:50 AM

So far, SPX has respected the backtest, coming pretty close to the .886 at 2269.24 on VIX’s initial push below support.

It’s important to note that SPX is backtesting a channel (the purple) which is, itself, a backtest of a larger channel (the white one.)

CL is doing the same thing, with the purple backtesting (including higher highs) the white one below.

USDJPY has more upside room, and has so far shown no interest in abandoning the rising white channel.

And, of course, VIX can continue plunging lower through whatever straw man support they care to construct, with the yellow channel bottom way down at 11.2ish.  Just because it’s held 4 times since July 2014 doesn’t mean they can’t smack VIX down below it if need be.

Note that crude inventories come out at 10:30 this morning (correction: tomorrow morning due to the holiday), and FOMC minutes come out at 2PM.  Inflation ticked up in Europe today, sparked primarily by higher oil prices.  PPI doesn’t come out in the US until Jan 13.

But, it’s already obvious that the higher oil prices which are propping up the “market” are creating significant inflation problems and attendant higher interest rates.  Perhaps, today, we’ll get a hint of the Fed’s frustration (panic?) at the prospect of stagflation — the corner into which they’ve painted themselves.

UPDATE:  10:16 AM

If CL’s purple channel breaks down, we could easily see SPX drop back to 2258.79 to backtest the SMA10 or gap close at 2255.71. The SMA5 10 is crossing it now.  I’d be prepared to short on any drop through the .786 at 2265.22.

Note that VIX has already broken through support just to keep SPX (barely) in the purple channel.

UPDATE:  10:29 AM

SPX is breaking down slightly.  I’d switch to short with an initial target of the SMA10 and additional targets at 2257.32 and 2252.70. To get there, SPX must drop through the rising SMA5 20 and the gray channel top at 2260.76.  So, tight stops are in order, as the drop could be cut short.

I have to jump on a conference call for 30 minutes or so.  Will be back ASAP.

UPDATE:  11:34 AM

Getting stopped out here on the short, as VIX isn’t letting go of the meltup.  Back to long if SPX spikes past the .886 at 2269.24.  That would be an ideal time for VIX to plunge lower.

UPDATE:  11:56 AM

It doesn’t qualify as a spike, but I’ll play along with the move through the .886 — with very tight stops.  Back to long, watching VIX and CL, which is now testing the SMA10.

USDJPY might be the one to suffer with the FOMC minutes, as the USD has benefitted greatly from higher interest rates.  If a dose of reality is reinserted into the equation, we could see DX drop and USDJPY with it.

UPDATE:  1:08 PM

An hour to go before the minutes…  SPX is still lurking around the .886……propped up by CL, which just pushed above the SMA10… ….and USDJPY, which just broke out a bit past a very short-term TL (hey, I don’t make the rules.)

VIX has been inching higher, probably so it has somewhere from which to fall when it comes time for SPX to break out.

I’m going to take a break until the FOMC minutes are released.  I’d keep your stops tight, as any retreat from the purple channel backtest could snowball.

UPDATE:  2:02 PM

Shorting here on hawkish Fed minutes, as USDJPY and CL are dumping and VIX fully recovered from its initial pre-plunge.  It makes me believe they’d be open to a dip to 2258-2259 to backtest the SMA10 and red channel bottom.  Are there are any real (non-algo) investors out there?  If so, they should be selling.  If SPX can hold 2268, then 2298 is on the table.   Obviously, tight stops are in order.

UPDATE:  2:39 PM

SPX continues to melt up on a higher USDJPY and capped VIX — with CL in reserve if needed.  Back to long at 2271.01 with tight stops.    Any dip back below the SMA5 20 (about 2270) and purple channel bottom and I’d be happy to re-short.

Obviously, we’re only one day and 1.1% away from our projected top.  Does it make sense to hold long for it?  Cash looks awfully good here, too.

UPDATE:  3:03 PM

Let’s take a quick look at the big picture, and the potential catalysts for a run up to 2298. First, the FOMC minutes were hawkish, meaning we could see additional upside for USDJPY.  We’ve had a target at 120.11 in the days ahead for quite a while.

The DX supports this, with a breakout target at 105.989: the top of the rising red channel and the 1.618 Fib.

NKD, which is a derivative of sorts of the USDJPY, is on another tear today — popping above the .786 and well above the SMA10.  

CL, which held the purple channel bottom and is hanging around the SMA10 — which it could easily pop back above at any time.  We have API inventory data coming out this afternoon and EIA tomorrow.

VIX has some room to drop — but not a lot if it intends to hold the yellow channel bottom.  11.26-11.35 looks like the bottom, which would probably be enough to drive SPX 1% higher.

Last, there’s a lot of focus on the Dow getting to 20,000.  But, take a quick look at RUT and you can see that it just broke out of the falling white channel it’s been in since Dec 9.  The floor they put under it at 1353, tagged again last Friday, suggests a potential flag pattern which is a continuation pattern (i.e. consolidation, leading to a possible breakout.)

Bottom line, there is a path to 2298 that wouldn’t require much effort or cost.  The question, for as long as we’ve been watching this analog, has remained “what happens when we reach our upside target?”  If stocks were to follow the 2007 path, tomorrow would be the all-time high and would be followed by huge losses over the ensuing 18 months.

Obviously, the folks with the means to construct this analog aren’t in the market crashing business.  So, at some point they’d want to depart from the analog’s path.  It could come at the high, with a breakout above important overhead resistance, or it could come after a corrective wave from the top — a rebound that, in 2007-2008, didn’t happen.

I don’t know the answer to this.  In July-Aug 2011, the analog was good for 296 points (21.6%) to the downside.  I honestly thought TPTB would step in and prevent such bloodshed before it got that bad.  In the end, it took a 2/3 devaluation of the yen and breaking the bond market to end it.

From a fundamental standpoint, one could make the argument that we’re in a similar place as in Oct 2007.  Various housing markets seem to be topping, with rising interest rates and continued contractions in real disposable income continuing to worsen affordability.  Auto sales were way up today.   But, inventories are through the roof, incentives were plentiful, and rising rates won’t help.  Retail sales comps are coming in ugly this afternoon, with stores like Kohls, which cater to less well-heeled customers, slashing 2017 estimates by 10% and Macy’s laying off 7% of its workforce.

All the above is occurring in the midst of a huge run-up in oil prices.  Year over year, CL is up over 50% versus its 1/4/2016 close.  This means inflation will be an issue — even if oil crashes, as I expect, over the next 5 weeks.  Again, more inflation and the associated higher interest rates mean more pressure on nearly every aspect of the economy.

Japan could always depreciate the yen, again. It’s nearly to the once-critical level of 120.11.  But, higher oil prices and lower yen values are a recipe for stagflation in Japan.  So, it would be a temporary “fix” at best.  So, the yen carry trade is in for some stormy weather – at best.

In any case, we should find out tomorrow what TPTB have in store for us.  As always, only hold long if you can hedge or handle the risk of a gap higher overnight.

 

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My power went out about 5-6 times last night.  Murphy’s Law stipulates that it’ll happen again, and at a crucial time.  If something big is going down and you don’t see a comment here, one way or another, you’ll know why.  It typically takes a few minutes to switch to a cellular-based connection with battery powered laptops.  If my cell connection goes down, it means packing up my laptops and heading for the nearest coffee shop with wifi — which can be 20-30 minutes away depending on how widespread the power outage is.  I’ll post a notice if that happens.