With CL finally melting down and the USDJPY failing to break out (despite four close calls yesterday), it’s up to VIX to prop up stocks today…if it can. It’s tried to break out of its falling white channel six distinct times since the start of the year. 
Each time, it’s been smacked down — effectively putting a stop to the decline. Will this time be any different? We remain short from 2297.02 and our downside targets remain the same.
continued for members… (more…)
When I called a top in oil last October, I added the caveat that we could get a replay of the previous year’s delaying ramp that would keep stocks rising into the year-end. As it turned out, it wasn’t just a delay; it produced marginally new highs (+3) that sent SPX to new highs as well.
This all occurred against a backdrop of soaring inventories in crude and an increasing rig count — which made the price manipulation all the more obvious. Yet, here we are. CL is back to where it was in October, at roughly double its Feb 11 lows. 
With inflation having reared its ugly head, thanks largely to oil, is it any surprise oil is off sharply the past two days? And, is it any surprise that the other members of the “market” support troika are working overtime to keep stocks from following suit?
continued for members... (more…)
We’ve discussed the ultimate outcome of our analog countless times. It provided higher price targets all along, aeach of which was met or exceeded, even as normal retracements or backtests have been largely prevented.
Given the enormous manipulation going on in oil and VIX, in particular, it must be a little disconcerting to TPTB that they haven’t achieved more of a breakout. Is it a sign of the flagging effectiveness of the manipulation, or is it possible that a meaningful backtest will finally be allowed?
The key might lie with USDJPY, which just tagged our 111.98 target from last week. Better late than never!
continued for members…
We’ve had breakout after breakout, but the net point gains have been modest.
Part of the reason for the modest returns has been USDJPY,which has been managed steadily lower since mid-December. 
There is certainly plenty of room for it to work lower. 111.985 is only a 38.2% retrace of the post-election rescue operation.
But, remember, it never quite reached the obvious target of 120.11 — preferring to leave it available for another leg up. I can’t shake the feeling that a rally to 120.11 or slightly above is being held in reserve for either (1) the next time a rescue is needed, or (2) the next important breakout.
And, that’s where CL comes in. We know that it’s still sitting at twice its Feb 11, 2016 price of 26.05. Unless it starts falling right away, gas prices will come in at around 30-35% YoY higher this month.
The January CPI numbers coming out on Feb 15, even if massaged extensively, are likely to show a pickup in inflation – which had already tripled (from 0.7% to 2.1%) in the past two years in last month’s report. My guess is at least 2.5%.
TPTB have a very narrow window within which to take oil prices back down if they wish to avoid a higher headline number for February than in January.
Frankly, I’m surprised it hasn’t happened already. I can only assume the forces working to keep oil elevated since it “broke down” from that rising purple channel on Jan 9 have very deep pockets and are very determined. Or, maybe they’re just amassing huge hedges.
In his remarks this morning, Mario Draghi said that “underlying inflation pressures remain very subdued and are expected to pick up only gradually.” Looking at the charts below, the word “gradually” hardly seems to fit.
Likewise, in its statement last week, the FOMC downplayed the risks of inflation, stating that:
Inflation increased in recent quarters but is still below the Committee’s 2 percent longer-run objective. Market-based measures of inflation compensation remain low; most survey-based measures of longer-term inflation expectations are little changed, on balance.
Again, the CPI charts tell a different story.
Of course, the Fed looks at core inflation, ignoring the contributions of the “too volatile” food and energy categories. Unfortunately, the average Joe doesn’t have the luxury of ignoring these costs, and has to pay actual rent increases instead of owners’ equivalent rent — a phony definition of rent that vastly understates actual inflation.
Last October, Janet Yellen talked about letting the economy “run hot,” wondering aloud whether a “high pressure economy” could reverse some of the damage done in the GFC. But, in her Jan 19 speech at Stanford, she stated that “allowing the economy to run markedly and persistently hot would be risky and unwise.”
She went on to say it “will not be easy to find a path of rate hikes that can foster strong jobs growth and 2-percent inflation, given the uncertainties of global growth, slow domestic productivity growth, and a change in fiscal policies, among others.”
She left out the part about rising interest rates being a headwind for stock prices, and how keeping inflation in check would require oil prices tanking in the near future — also a major impediment to the market’s ongoing melt-up.
And, how will the impending trade war(s) and a persistently high US dollar impact the Fed’s plans to raise rates? Exports are off and imports are on the rise. Can the Fed engineer a lower US dollar, higher interest rates and higher stock prices all at the same time? Not unless the laws of mathematics are repealed and replaced.
I think the more likely scenario is to raise rates in March (I know, I’m very much in the minority here — what else is new?) and let the dollar — and, thus the USDJPY — continue to appreciate while forcing a mini-crash in oil and gas.
It’s a tough bet to make, as USDJPY’s momentum has been just plain lousy. After becoming wildly overbought post-election, USDJPY maintained negative divergence for two months with RSI only recently breaking down.
It should bounce here. But, if not, USDJPY’s SMA200 is approaching the purple .618 at 107.86. And, its SMA100 just crossed the purple .500, which is the next lower level of support.
All this leads me to the following theory. If CL breaks right away, and if USDJPY doesn’t bounce, and if VIX doesn’t plunge back below 11, we could get a sell-off to 2250-2255 this week, and another decline to, say, 2245 by Feb 23.
It works from a channel standpoint, allowing SPX to remain in the sharply rising yellow channel that dates back to Nov 4. It also works from a harmonic standpoint — with 2245.07 representing the white 1.272 extension that was set up by the decline to the white .786 on Jan 31.
But, that’s a lot of if’s. And, thus far, declines of any size have been very hard to come by. Much more common are break outs motivated by sudden swoons in VIX and sudden spikes in CL and USDJPY.
If it were to happen, such a decline wouldn’t even make a dent in the post-election spike (a 23.6% retrace would be 2249.) In fact, the daily chart argues for a deeper retracement to, say, 2220ish — the top of the rising white channel that SPX broke out of in November, the purple 1.272, and the gray .382. 
It would also facilitate a tag on the midline of the rising purple channel which dates back to the Brexit lows. It can be seen nestled in between the large yellow channels .236 and midline in the chart below.
Bottom line, there are countless lower targets that would each make perfect sense in one way or another. But, our analog, which has worked so well in identifying turning points so far, recently erred regarding Day 141.
It should not have involved a breakout; nor should it have involved a higher high. As such, the odds are that the analog has finally broken down and we’ll push to new highs before any significant downside sets in.
Just know that the potential is there should all those “ifs” come together.
UPDATE: 1:20 PM
SPX is coming up on our next downside target, the .618 at 2288.08. Traders — be aware that we could get a bounce here. The SMA5 200 was just tagged. Even though CL has broken below its SMA10 and USDJPY appears headed lower, we’ve had plenty of overnight gaps higher lately. 
VIX, having been brought back into the falling white channel, is in a position to break out…or not.
Note that CL isn’t that far from support at its SMA100 (49.66) and SMA200 (47.94.)
Note, also, that ES has backtested its SMA10 as expected. Bottom line, the risk of a breakout remains elevated.
As always, only hold short overnight if you can hedge or handle the gap risk. GLTA.
More Hostgator problems this morning — third day in a row. I thought things were resolved yesterday after two hours on the phone with them…apparently not. Gladly accepting any recommendations for a new hosting company. Anyone out there really, really happy with theirs? Please contact me directly.
* * *
I’m watching both USDJPY and CL break trend this morning, selling off after a supposedly bullish employment report. But, VIX’s 10.4% decline from yesterday’s highs is offsetting both, ramping ES by nearly .50%. Is VIX the only tool that matters any more?
continued for members… (more…)
I had the privilege of speaking to a group of bright, young Masters of Financial Engineering students from my alma mater on Tuesday. After relating some truths about how markets are manipulated day in and day out, I wondered whether the message had been too frank and too, well, depressing.
Are things really as bad as they seem, or have I become too cynical? I didn’t have to wait long for an answer.
Yesterday’s FOMC statement had the potential to disappoint. If the FOMC were to publicly acknowledge the elephant in the room — surging inflation that they, themselves, created — interest rates would certainly be much higher than they are and heading higher still.
In the seconds following the FOMC’s 2PM release, SPX started to dip below a very minor trend line (in red below) and the 200-period moving average on the 5-min chart — often intraday support.
TPTB responded with a stunning 16.6% smack down on VIX that sent it lower than it has been since February 2007, only .58 above VIX’s all-time low of 9.39. It was enough to put SPX back above the TL and, briefly, back above the short-term moving averages.
Oil, fresh off back-to-back bearish inventory reports Monday and Tuesday, also helped out with a 4% ramp. Price discovery at its finest.
Thinking back, my message probably wasn’t frank enough. The FOMC hates for the “market: to decline on days it makes rate announcements or holds press conferences. It’s important to Yellen et al. that investors have confidence in the wisdom of its actions — or, in this case, inaction.
How much longer can this go on? I don’t really know. But, it has direct bearing on the outlook for our current analog. So, I suspect this is the attempt to break out of the pattern that has guided our forecasts reasonably well since August [see: New Analog – Aug 3] and would send prices much lower in the weeks ahead.
continued for members… (more…)
Today is setting up as a potentially wild ride, with plenty of earnings, employment, oil inventory and sentiment data to digest…on top of a FOMC rate announcement that could surprise in its hawkishness.
SPX came within 5 points of our next downside target yesterday before VIX began its daily plunge — this time a 10.8% crush after coming within a smidge of our 13.01 target. 
VIX’s plunge continued overnight and, along with USDJPY’s bounce off our downside target and CL’s usual ramp job has levitated the futures just ahead of the open.
continued for members… (more…)
Stocks shed over 1% yesterday, easily reaching our initial two targets and almost our third before being rescued. it was the biggest drop we’ve seen in quite some time. A little over an hour into the session, VIX decided it had had quite enough. It plunged 8.8% from its intraday highs…just because. And, SPX closed off only 0.6% — still an impressive accomplishment relative to the melt-up we’ve seen over the past several months.
The BoJ meeting was of no particular import. The focus was more on the eurozone, and the ECB’s potential reaction to its little inflation problem. Some are ready to talk taper, while Draghi is likely to continue pounding the table for more stimulus to provide a floor for the ECB’s growing pile of junk.
The focus will shift, now, to the Fed — which has its own, even bigger inflation problem. Traders know it, and they’re more than a little worried.
continued for members… (more…)
CL is on the verge of rolling over, even as the ramp in USDJPY that helped prop up markets on Thursday and Friday is settling back for at least a backtest. 
The net result is that we’re finally getting some follow-though to the sell off we anticipated last week.
Futures are currently off about 8 points, after selling off as much as 10 points overnight. Our downside targets remain essentially unchanged.
continued for members… (more…)
The economic headlines are ugly this morning, with durable goods off 0.4% versus the 3-4% gain expected. The chief culprit, of course: trade. Funny how no one wants to buy US goods and services when the dollar is higher than it’s been since 2002 — oh, and we’re launching a trade war against the rest of the world.
The last time exports stumbled this badly was the second quarter of 2010, which was also in the wake of a rapid run up in the USD.
This certainly reinforces our stagflation case, as both higher oil prices and higher USD, which have been used so effectively to prop up stocks, have painted the Fed into an ever tighter corner.
Let’s see… That leaves body-slamming VIX as the sole means of averting a strong sell-off today. Prepare for it to reach new lows in 3-2-1…
continued for members… (more…)
Today will be a continuation of yesterday’s Big Picture update, with a focus on the continuing relevancy of our analog from last August.
continued for members… (more…)
