When we last focused on bonds back in October [see: Plan B] we noted that 2s10s spreads were collapsing and 10Y prices (ZN) had reached important support.

Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy.  Bottom line, they aren’t good.

This followed a supposed “breakout” in yields that we never bought.  Even as nearly everyone around us called for 3.5 – 4% yields, we saw them falling from 3.24% back to our 2.85% target — which is exactly what happened.

Since then, ZN has rallied sharply, reaching our 121 target last week and threatening higher.  And, 10Y yields have broken below a trend line dating back to July 2016.We’ll take a look at the road ahead.

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As we noted last week, the top of the purple falling wedge is also the midline of a falling (gray) channel — providing a potential breakout in price with solid, potential targets.

Looking at the bigger picture, we can see that ZN is also backtesting a flat, gray flag pattern dating back to 2012.  When it broke down earlier this year, it opened the door to a tag of the large, white channel bottom.

Meanwhile, the breakdown in yields provides solid potential lower targets, with the falling yellow channel .786 at 2.492 looking like the first important test.If it fails, as expected, there are many lower targets that come into play.The price chart provides some targets that fit: 123 for the 2.498 target, 127 for the 2.172 target. The chart below shows potential timing via a recently added falling white channel.Obviously, the above requires yields to continue breaking down and price to break out — a scenario I’ve favored for a long time.  I have never bought into the idea of yields breaking out, simply because I don’t believe the Fed would allow it.  It would be much too onerous from a budget standpoint.

What about the impact on stocks?  (more…)

Wishing everyone a very, Merry Christmas and a New Year of peace and prosperity.

Watching this administration operate the markets, I sometimes get the feeling they’re trying to throw the game.  Witness Mnuchin’s bizarre announcement that everything is fine, there are no liquidity issues, I’m going to convene the PPT just for the heck of it.

It’s akin to bursting into a crowded theater and screaming “don’t worry, there’s no fire!”  Sure, some might reach for another handful of popcorn.  Wouldn’t you at least look around and sniff the air more carefully?  Maybe a few of us would even make our way toward the exits — just to be on the safe side.

Futures are currently off 14 points on what might otherwise have been a typical maintenance-mode Christmas Eve.But, that’s not the problem.  After reaching our latest downside target on Friday, SPX closed below support.  And, this morning, USDJPY and TNX have broken down.  VIX, which already broke out last week, is threatening another breakout.  This is no way to run a rescue operation.

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Thus, equities are likely to continue to our next lower targets.  ES’ falling white channel has broken down and the smaller red one might well follow suit.

SPX’s falling white channel has been expanded so many times, it no longer makes any sense.  As I wrote a couple of weeks ago, this is looking more and more like a 2011-style breakdown.

VIX has potential resistance here at the red channel top, but the white channel top and the .618 and .786 Fibs present an easy alternative since last week’s breakout.

It’s also worth keeping an eye on COMP, which has very nearly reached our next downside target… …and AAPL, which is only 4 points away from our 144.48 target in pre-market trading.

A bounce by either, or both, could do wonders for the broader market — especially if the PPT takes concrete action (e.g. whacks VIX.)

The currency picture.  USDJPY is heading toward its .886 at 110.31.  If it doesn’t bounce there, we’re likely headed for 108.46, the 1.272 and a backtest of the broken gray channel.

EURUSD continues sideways, with the SMA200 in easy striking distance.

And, DXY continues to do a lot of nothing……even though TNX has clearly broken down.

Even oil and gas are getting in on the bearish action with breakdowns of the more orderly path they might have taken to our next downside targets.

I intend to post updates to bonds, gold and maybe a few others later today — probably after the 1pm close.

GLTA.

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Lots of targets were reached yesterday.  USDJPY reached our downside target at its SMA200.VIX reached our next upside target at the .500 Fib.Gold reached our next upside target. ZN reached our next upside target.And, CL reached our next downside target at the .618 Fib.With so many key levels being reached, it’s not surprising that SPX reached our next downside target and got a nice bounce.  The question is whether it’ll hold.

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The doves are up in arms, incensed that the Fed would dare raise rates (and more to come!) in the midst of an economic downturn.  Never mind that most of these doves were the ones pounding the table last week about how wonderful the economy is.

Are they right?  Yes.  And, no.  Here’s why.

When the Fed first started talking about needing to aggressively raise rates, inflation was a problem.  Interest rates were spiking higher which, with $22 trillion in debt and a massive budget deficit, would sink the economy that much faster.

But, the White House got the message and started working to push inflation lower.  First came the tweets, which didn’t help at all.  These were no doubt followed by back room negotiations, which also didn’t help.

Finally, Jamal Khashoggi had the bad fortune to be butchered by the Saudis.  In the face of international outrage, Trump finally had some leverage. He could protect MBS and friends; but, it would cost them.  Beginning the very day that Khashoggi was killed, WTI and RB plunged over 40%. CPI followed suit, but not in time. Because the YoY delta in gas prices will be negative in December, CPI might very well decline below 2%.  But, it won’t be reported until January.It was enough to make the Fed eliminate one 2019 rate hike, but not enough to forestall yesterday’s rate hike or assuage the doves regarding the path forward.

If CPI comes in at 1.9% in January, the Fed can say “look, no more rate hikes for a while ’cause we’re data dependent.”  The doves will love that.  But, it’s too late for 2018.

On another note, I heard someone on CNBC this morning say that it was wonderful that the US dollar was declining, as if this was a good thing for the markets.  Obviously, this person doesn’t look at charts, or at least the USDJPY chart.

As expected, the pair is plunging toward its SMA200 — with the usual impact on stocks.

More bad news for bulls: VIX, which has toyed since Oct 11 with a fan line off its Feb highs, is seemingly breaking out.

Our downside targets remain unchanged.

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Oil reached our next downside target range yesterday.  This completes a 40% decline for CL since our Oct 3 top call [see: VIX Takes the Plunge] and brings our YTD gains to 177%.

From our Nov 9 Update on Oil:

CL just reached our next downside target of 59.47 and, RB has reached our target range of 1.58-1.62. This is important support for both which, if broken, would portend much more downside.  If it fails, there are much lower targets that would come into play: the gray .382 at 57.47, the purple .618 at 55.36, the gray .500 at 51.47 and the purple .886 / white .236 / gray .618 at 46.02.

Yesterday’s tag:

While it’s always nice to nail a forecast target, the commentary which accompanied that post was at least as important:

Ultimately, oil and gas’ path forward will decide much about interest rates and broader markets.

CPI dropped from 2.95% in July to 2.18% in November, low enough to prompt many Fed watchers to call for a halt to further rate hikes — which is exactly what led us to call for a sharp decline in oil and gas prices in the first place.

The big question is whether it’s enough of a drop.  For the answer to that, we’ll have to wait for the FOMC’s statement this afternoon.

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Doves are harmless, right?  Suppressing interest rates and pumping markets full of cash for 10 years straight has obviously done wonders for stocks. What could go wrong?

Nothing, unless you consider the markets’ addiction to easy money a problem.  The mere hint of the Fed normalizing rates and “allowing” a business cycle to play out has the doves massing for an attack straight out of a Hitchcock movie.

Opinions are all over the map regarding tomorrow’s Fed decision.  I suspect the committee members, themselves, are somewhat bewildered. The US has taken on way too much debt and can’t afford higher interest rates.  Yet, until recently, inflation dictated that they tighten.

Will inflation’s recent decline stick, or will it bounce back toward 3% the moment Trump takes his boot off Saudi Arabia’s neck?  And, what about those sectors of the economy which have relied on low interest rates to do as well as they have?  Will the Fed knowingly nudge autos, housing and financials into a recession?

To hear our Dove-in-Chief tell it, more rate hikes will unravel all the wonderful things his economic policies have accomplished.  Can the Fed afford to appear subservient to the president, even if they did agree with him?

The charts don’t much care about all that.  Yesterday, major indices reached tipping points below which things could get really ugly.  Once such index we’ve focused on lately is the Nasdaq Composite (COMP.)  Yesterday, it reached our downside target from October [see: Plan B] and, after a great deal of consternation, put in a bounce.

Whether or not the bounce holds is critically important, as it represents a backtest of a breakout which began two years ago.  If the red trend line doesn’t hold, the index is susceptible to a drop of another 8-24%.Many other indices are in similar situations.  Perhaps this is why we’re getting mixed signals from the algo drivers which have been such reliable indicators of future direction.

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An important test lies just ahead.  With SPX and ES having closed below their Head & Shoulders necklines on Friday, the inference is that the bottom just dropped out.  The real test will come, however, if COMP drops more than 1.6% to below 6801.75.

This, our downside target since October 10 [see: Plan B] represents an important fork in the road.  Then:And, now:Not exactly a very straight line — but, it got here, and pretty much on time.

A bounce here and stocks can finish the year at least even.  A failure to bounce, and the bears have a clear path lower.

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