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Futures have been all over the map overnight, ramping from 2445 on yesterday’s open to as high as 2567.50 a few hours ago.
Perhaps significantly, ES failed to retake the yellow neckline at 2568ish despite the usual smackdowns in VIX and 2s10s. The 2s10s dropped back through the white TL support which has been the last line of defense for bulls…
…and, VIX is threatening another breakdown – this time marked by the SMA5 200 and a TL from last week’s lows.
We might assume that our 80.30 target — reached two weeks early — continues to be the line in the sand for another leg down.
It makes sense since: (1) the economic picture continues to worsen; and, (2) neither SPX nor ES ever quite reached important Fib support – our 1.618 targets at ES 2155 and SPX 2138.
If ES’ and SPX’s white channels are yielding in favor of the slightly less aggressive purple channels (channel tilting) then we can look for a .618 or .786 retracement of last week’s lows.
Once the neckline is topped, however, both would have room to run.
For now, the algos continue to follow VIX’s lead. A drop through the SMA5 200 would point to a test of the SMA20 and red neckline at 58.60. A drop through it would unleash the bulls for another leg up.
Working against that outcome: CL continues to falter, dipping below 20 several times overnight.
Remember, the white line at the bottom of the chart is critical support — reached, in this case, several years ahead of the what our cycle model charts indicated. A slowdown shutdown of global economic activity will do that to you.
RB, which saw a nonsensical bounce last Wednesday, is coming to its senses this morning. Like CL, it is walking on eggshells in terms of support.
Getting back to the bond market… The Fed appears to have finally figured out what our yield curve model has been saying for the past year or two: a breakout above critical support in the 2s10s would decimate stocks just like it did in 2000-2003 and 2007-2009.
While the 2Y has dropped through support again…
…the 10Y is more than keeping pace…
…allowing the 2s10s to decline sharply.
Of course, a drop back below the 1.272 Fib at 8.16 should also be expected to spook algos. So, this is a move that cannot really help the bulls longer term unless the 2Y were to spike higher – unlikely in the current central bank cash-for-trash environment.
On the currency front, USDJPY found its footing overnight at its SMA20 and bottom of its formerly broken white channel and backtested its SMA200 – now at 108.306…
…which, along with EURUSD’s temporary push above its SMA200…
…enabled DXY to bounce before even reaching its SMA200.
The algos might be forgiven for being slightly confused. There have been so many supportive actions on the part of bonds, currencies and VIX – but, not yet enough to force a breakout. The implication is that they are being tasked with delaying the next leg down rather than engineering another leg up. This jibes with our belief that month- and quarter-end rebalancing is driving much of the upside.
As always, I’m open to being proven wrong. But, at this point, the bulls are behind the eight ball – with a handful of gimmicks tasked with offsetting some compellingly bearish economic reality. Trump acknowledged that things won’t be better by Easter, though he falsely maintains the virus will “peak” by then.
Unless one of the treatment protocols being experimented with proves successful in the next week or so, the virus will be much worse by then. Our model has been right on track and continues to indicate deaths (2,484 as of yesterday) will reach 10,000 by Friday or Saturday and 100,000 by Easter.
On a positive note, Italy has seen a slowdown in the daily rate of growth in cases and deaths. Over the past few days, cases have grown at 7% per day and deaths at about 10% per day. Unfortunately, deaths have topped 10,000 and the mortality rate (deaths as a percentage of total cases) now stands at 11%.
It would be nice if the US could look forward to such a slowdown. But, in the absence of widespread lock-downs and given the continuing shortage of testing kits, this is hardly likely. Studies show that up to 50% of infections are from those who have few or no symptoms. Without widespread testing, we will see the lag between Italy and the US – originally 11 days and now down to 7 – continue to quickly erode until the US takes the lead in deaths.
UPDATE: 3:00 PM
ES has pushed above the neckline and is testing the SMA20, though SPX has yet to register a new high.
VIX has broken below its SMA20 and neckline, but not yet the typical cratering that we often see in the final hour.
CL and RB are rebounding somewhat, but lower lows and lower highs for both so far.
This leaves USDJPY, which failed to retake its SMA200, and DXY, which has yet to backtest its SMA200. Bottom line, this still looks like a stall and not a breakout to new highs, especially when you take the near breakdown in 2Y and breakout in 2s10s into account.
For traders with a strong constitution and the ability to hedge overnight, this is another selling opportunity.
SPX studiously avoided a higher high, thanks largely to USDJPY’s last second breakdown which offset the VIX dip at the close. In other words, TPTB are working to keep the bounce contained (for a change.) This doesn’t mean it won’t ramp higher overnight, but it’s a good sign (or a great head fake.)
FWIW, ES even backed off its SMA20 and made a lower high…
…while VIX found a little TL to backtest.