I don’t look at the DJIA very often, as I consider it ridiculously corrupted and manipulated [see: Update on DJIA Nov 2016.]  But, once in a while, I’m reminded of how it matters.  This is one of those times.

On Feb 9, when SPX and ES were tagging their SMA200s, DJIA dropped only to 23,360, about 566 points (2.5%) away from its SMA200.  Thus, it was robbed of the opportunity to backtest important support.  Because stocks have been going sideways for the past two months, it finally got its chance yesterday — tagging the moving average in its plunge to 23,344.  It was a slightly lower low than in February, meaning that DJI has technically completed what many would consider a normal corrective wave (ES and SPX have not.)

Given that DJI latches on to any and every support it can find, what are the chances that it won’t bounce here?

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After nailing our next downside target yesterday, the S&P 500 closed below its SMA200.  This normally bearish signal attracted a lot of attention. So, I thought it might be interesting to see what past instances have looked like, and how serious an issue it might be for the market this time.

SPX has dropped and closed below its 200-day moving average 18 distinct times since its 2009 lows. The dips ranged from 1 day to 62 sessions, with the average being 18.  And, the extent of the subsequent cycle* move ranged from -14.35% to +2.15% with an average of 3.87%. The declines averaged 0.29%/day, which adjusted to “no change” when including head fakes.There were three head fakes, defined as a close below the SMA200 which was followed by a close back above it the very next day.  These losses would have been -0.07%, -1.80% and -2.15%, assuming one didn’t cover until the following session’s high.  Obviously, tighter stops would have meant much smaller losses.

If we toss out the three headfakes, the average decline of the other 15 instances was 5% over a period of 22 sessions.  A 5% drop from yesterday’s close would be 129 points, to 2451.  Interestingly, this is within a few points of our next downside target — should SPX fail to hold its SMA200.  Below that, things get really ugly.

If it does hold 2590, there’s a very good chance it’ll join the ranks of the head fakes.  With the futures up about 20 points on VIX’s potential drop through support, SPX will gap back above its SMA200.  The more important question is: if VIX holds its support, how much further could SPX drop?continued for members… (more…)

ES off about 12 points at this time, working towards backtesting a TL from last Wednesday. This would mean giving up about half its meltup since then, with plenty of indicators still pointing toward additional downside — but, VIX continues to insert itself into the equation in a big way.

TNX has reached trend line support, minimizing that particular drama by having delayed the drop.But, oil and gas still have a big drop ahead of them. And, virtually all of the bell cows we’ve been tracking these past few weeks (TLSA, FB, AMZN, DB, etc.) continue to look quite vulnerable.

Toss in the fact that the yield curve is making new lows.  Can the market keep it together?Our downside targets from Mar 28 [see: More Where That Came From] remain in force.

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Futures are up 10 points overnight, but are still well within the 42-pt range set over the past two days following the latest breakdown.We have a pretty plausible case for considerable additional downside.  But, as we all know, holiday weekends are infamous for pattern-busting breakouts.

VIX, perched on the line in the sand between a rally and a plunge, has a clear path to levels which would practically guarantee a sharp rebound.  But, that has been the case the past few days, when rising channels broke down across the board.  Hence, our fascination with the downside case for equities.Throw in the fact that CL and RB remain overly elevated (and, also on a precipice of their own), our yield curve model is still bearish, TNX and DXY have much further to drop, and it’s hard to feel bullish at all.Then, there’s this canary in the coal mine.  DB has fallen an additional 15% since our last look [see: What is Deutsche Bank Trying to Tell Us?]  It has another 10% to go before reaching our 12.30 target.

That would be a total 39% drop from its December highs.  As one of the biggest banks in the world, with $50-60 trillion in derivatives, should we be alarmed?

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It was a nice try, but yesterday’s early morning ramp job fell apart in spectacular fashion.  It’s ironic that the decline is being led by the same stocks which promised a moon shot.

As we discussed last week, FB’s drop below its SMA200 and .786 channel line was poison for the overall markets [see: Facebook Flops.]

So was the yield curve’s plunge through double support [see: Yield Curve – a Closer Look.]TSLA’s head on collision with reality was icing on the cake. TNX has finally complied with our forecast, plunging through horizontal support yesterday.  By waiting, of course, its trend line of support  doesn’t represent much of a move any more. As such, DXY has been able to put in a decent rally — aided, of course, by a healthy flow of funds fleeing equities.

Our downside targets remain in place.  I’ve even added a worst case target that some might find surprising.

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VIX and USDJPY have come to equities’ rescue (better late than never) again.  And, the algos are loving it — so far, at least.

USDJPY, which has looked extremely weak ever since January, when two channels broke down, has broken out (again) above a trend line (red, dashed) from Jan 8.  It’s latest reincarnation began on Sunday and contributed to yesterday’s huge rebound off our downside target.Likewise, VIX gave the bulls a shot of adrenaline, with a drop back below the rising channel bottom from early January.   The trick is figuring out whether or not the drop will stick this time.Meanwhile, our FB and yield curve models are still shouting “sell!”  We’ve seen major trends broken in the past two months — largely because our algo inputs were unable or unwilling to keep the crap game afloat.  Can the algos pull off a rescue that sticks this time?

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Many of our downside targets were hit on Friday, including SPX, ES, COMP, RUT and DXY.  As we wrote last Thursday [see: US Dollar – Time’s Up]:

…ES has tepid support at 2665.27 and 2635.29 and SPX way down at 2612.97, followed by the .146 at 2582.36. Note the SMA200 is up to that level now. It’s the lowest SPX can go and still find reasonable support.

We had a number of indicators pointing in the same direction, but had to wait and see if the white channel bottom would hold.  If it did, there was still an upside case to be made.  It didn’t.While it’s always fun to nail a target, Friday’s plunge means the analog we’ve been following since Feb 6 is kaput.  It doesn’t mean the market has no further upside, simply that that particular path is no longer being followed.

On the other hand, things are somewhat simpler here at the 200-day moving average.  Past experience tells us that when SPX reaches its SMA200, we usually get a nice bounce.  When we don’t, things can get pretty ugly in a hurry.

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For a moment, at least, markets were treated to another taste of reality: rates at an acceptable level, the US dollar reacting accordingly, the USDJPY tumbling normally, VIX not being hammered into submission, and oil prices reflecting fundamentals.  Algos, which have grown accustomed to generous support from all the above, simply reacted as they should have.

SPX, ES and COMP all saw their sharply rising channels from Feb lows broken.  And, we were left with very few silver linings at the end of the day.  As “luck” would have it, DXY and USDJPY have bounced and durable goods beat estimates (thanks to increased military spending.) So, ES has bounced 34 points off its overnight lows and is showing an 8-pt gain at the moment.

FB, an important bell cow the past few days, reversed off its SMA200 but bounced yet again at the white channel line we discussed a few days ago [see: Facebook Flops.]

If you’re wondering whether this channel line is important, consider the chart below.  The only time in recent history that FB fell below its SMA200 and the channel line without precipitating a big drop in stocks was when FB announced a $6 billion stock buyback plan.  How’s that for an efficient market?

Unfortunately for bulls, currency and interest rate issues have not gone away.  In fact, a strong durable goods number merely exacerbates the problems faced by the Fed: how to maintain dollar purchasing power while keeping interest rates low enough to keep the country from going completely broke.

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Yesterday, we asked in the lead-up to the FOMC announcement and presser:

Is there [a Fed game plan] which can keep inflation high enough (but, not too high), prop up the US dollar, keep interest rates under control, keep the market elevated and actually improve the economy?  Not likely.

Today, we have a definitive answer: no.  The 10Y is plunging……so, the US dollar is finally cracking. As expected, this is doing a number on USDJPY……which is doing a number on futures, currently off about 30 points.  This will put SPX back below its 2.24 and at a critical support point.

If you’re looking for a silver lining, don’t look at FB.  After ping-ponging between the channel line, the H&S neckline and its SMA200, it’s faltering again after Zuck’s fumbled apology….…which means COMP’s sharply rising channel will break down on the open.  Fasten your seat belts, folks!

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All eyes are on the FOMC’s upcoming rate announcement and press conference today.  The slumping yield curve, buoyant 10-yr and lethargic dollar are testament to investors’ angst over the Fed’s game plan.

Is there one which can keep inflation high enough (but, not too high), prop up the US dollar, keep interest rates under control, keep the market elevated and actually improve the economy?  Not likely.  Meanwhile, politicians have tripled the degree of difficulty by approving a sharp increase in deficit spending.

I suspect we’ll see the usual mumbo jumbo regarding a steadily improving economy, tightening employment without wage pressure, and additional rate hikes being data dependent, etc.  In the meantime, our analog just keeps chugging along.  SPX’s latest dip was halted at the important 2.24 Fib extension as expected.  But, a big part of the equation continues to be Facebook, which nailed our white channel line and rebounded to the neckline of a bearish H&S Pattern.continued for members… (more…)