Buckle Up

Algos have been given the green light by VIX, oil and especially currencies – which present an incredibly bullish picture courtesy of a signal which hasn’t failed in at least 20 years. But, the coronavirus is a different kind of threat with enormous implications. USDJPY’s improbable breakout smacks of desperation. Will the algos really behave themselves and get with the program or is this just another head fake to distract from the huge correction the bond market says is right around the corner?Buckle up.

continued for members…

A reminder of the support levels and the upside picture for both ES and SPX. The initial downside should be limited to backtesting and backfilling, such as the SMA10, SMA20 and the white 1.618 at 3336.50 as the algos have been given the green light to complete the IH&S.

But, the major downside support levels such as the yellow 2.618 at 3047 (which was never backtested), the 2.24 at 2703, and the 1.618 at 2138.04 will soon disappear from the path of the existing rising channels. It’s not an iron-clad guarantee, of course, as we saw in 2016. But, it’s pretty much now or never — a fact TPTB are no doubt aware of.USDJPY’s breakout is as strong a signal as we’re likely to see that TPTB are bound and determined to prevent any serious downside.The formula is very straightforward:

(1) Keep VIX below the SMA200 or, better yet, let it drift higher overnight and smack it back down every morning. Today’s paper tiger TL is all ready to go. (2) Make sure CL doesn’t drop below the bottom of the rising white channel again, at least until the purple channel bottom catches up. When necessary, CL, VIX and USDJPY can be used to offset one another when a reset is necessary.This includes continuing to use RB to meet CPI targets which, ideally, will hover just under 2%.(3) Make sure USDJPY runs higher, busting horizontal, Fib and pattern resistance along the way whenever the market shows any weakness on its way to the white channel top at 118.60.(4) Keep interest rates low (to counter the $1+ trillion deficit)……but the 2Y above 1.4%……and the 2s10s positive, preferably in the range of 14-22 bps. Remember it broke down on Jan 24 and is breaking down again today – a strong signal of lower prices ahead.The coronavirus is the ultimate wild card, of course. It is likely to blow all of the above provisions out of the water – starting with the currency and bond picture. A flight to safety which sends ES back below 3336.49 is a clear sell signal.

I’m not an alarmist or particularly pessimistic. But, I am a cynic. IMO, the Chinese government has very little credibility when it comes to reporting or dealing with the crisis. I think the quarantine efforts say it all. Why take such extreme efforts to isolate that many people if the risk isn’t greater than anything which has come before?

The continual changes in how to count infections and deaths are hardly reassuring. There would be no reason if there was actual good news that a corner was being turned.

Bottom line, I think it’s going to get much worse. I don’t think a change in the weather will prevent a pandemic, and all reports I’ve seen indicate a vaccine is at least a year away. Meanwhile, government and public health officials keep making terrible choices that promise to make things worse.

For instance, what gives with the cruise ship in Japan? If the incubation period is up to 26 days, why the hell would you release people after only 14 days? It seems pretty likely to me that the virus was so airborne and so pervasive in all parts of the ship that they decided to try to spare those who weren’t infected yet.

I think the fact that so many health care workers who presumably would take every possible precaution to prevent infection have died is a clear indication that the mortality rate is probably much higher than 2%.

China is putting people back to work in order to maintain a semblance of normal productivity. I believe this will backfire spectacularly and supply chain disruptions and a falloff in Chinese consumer activity will prove much more impactful than currently acknowledged. As cases spread beyond China to Singapore, North and South Korea, Hong Kong and Japan, quarantining will become very difficult if not impossible.

And, very few intelligent people are openly talking yet about the implications of it spreading to Europe and the Americas. The wonders of an uber-connected world are anything but wonderful when it comes to pandemics. Given that 1,300 flights ferried 380,000 people from China to the US in the past month, the pandemic has certainly already arrived on our shores.

I don’t know of a reliable method for quantifying the implications of a pandemic – especially given that the world is much more connected than even 20 years ago. All I know is that when important support breaks down, it’s time to short – especially when the usual central bank tricks aren’t working.

UPDATE: 11:55 AM

ES dropped through its SMA10 and came within a few points of the 1.618 Fib target at 3336.49 — the next backtest we discussed earlier. Since it is bouncing already, we’ll watch to see whether it recovers the SMA10 – now resistance. An inability to do so would confirm the downside case.

Note that SPX’s 1.618 is still quite some distance away… …and VIX hasn’t reached any particular resistance at this point.For those following the AAPL RSI story we discussed last week, note that it has broken down again after its initial recovery.UPDATE: 3:55 PM

Coming up on the close… I’ll wouldn’t be surprised if VIX dives back below 15.16 and ES pops up above its SMA5 200 at 3377.58. Both SPX and ES are back well above their SMA10s.Much rests on USDJPY’s ability to continue rising – quite dubious given the coronavirus risk in Asia.