The quandary central banks have been facing can be summarized as follows:

1. stocks can’t move higher without the support of higher oil prices; and,
2. oil prices can’t move higher without triggering inflation; and,
3. central banks must tighten if inflation surpasses their target thresholds; and,
4. the mere mention of tightening sends stock prices lower.

As CL neared critical support (after having reached our upside target last week) stocks were looking decidedly nervous.  Clearly, something needed to give.  Hence, Janet Yellen’s suggestion that inflation would be allowed to run a little hotter.

Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping [ed. note: this means lower stock prices] and aggressive steps may be needed to rebuild it.

Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”

In fact, the BoE’s Mark Carney said the same thing on the very same day.  From the Telegraph:

Mr Carney told an audience in Nottingham that the current environment of low inflation was “going to change”, with the drop in the value of the pound likely to push up prices across the economy.

He said food prices were likely to be affected first, signaling that the situation was “going to get difficult” for those on the lowest incomes as the UK moves “from no inflation to some inflation”.

Fed followers will find this pivot familiar.  Remember when reaching 5% unemployment was the bogie for discontinuing accommodative measures?

continued for members… 

Look for SPX to backtest the purple midline and SMA100 at 2141.21 today.  With USDJPY seemingly breaking out and CL having declined to complete the H&S Pattern, it has a very good chance of then breaking out of the falling white channel.USDJPY’s “breakout” isn’t much of one, but it upsets the apple cart for our lower SPX targets.  the backtest of the falling red channel is more and more overdue.

The bigger issue is CL itself, which has a chance to break out after having passed on the H&S yesterday.  If it can’t, this morning’s spurt should turn into a pop and drop.  If it can, then SPX will be back at the falling white channel top soon enough.

UPDATE:  10:07 AM

The initial spurt coincidentally topped the important 2138.04 Fib, and they’ve managed to hold it as the SMA5 10 approaches.  Decision time coming up…USDJPY is back within the flag pattern. And, CL might or might not be holding the SMA10.One key might be VIX, which has nice support here — if it isn’t hammered lower.  It’s already back below the SMA200…

UPDATE:  11:28 AM

Seeing an effort to break out of the falling white channel and challenge the SMA100 again.  It’s being driven entirely by VIX, which continues to trickle lower.

CL continues to remain subdued.And, USDJPY has somewhat broken down, with further to go if the charts have anything to say about it.

This doesn’t really feel like a breakout as much as it does a delay.  If they were trying to actually break SPX out, I imagine we’d see CL above its SMA10, for starters.  But, we’ll see.  I still anticipate a drop to 2103-2110 if SPX is able to get back down below 2119.

UPDATE:  1:36 PM

We’ve seen this movie before.  SPX just fell through the SMA5 10 and 20 and backtested the SMA100, right as the SMA5 50 arrived.   If it can hold the SMA100, I’ll give up on the idea of 2110.  But, for now, it continues to merely tread water.  The ES, in particular, shows signs of wanting to push lower.

Here’s a clearer view of the quandary:  test or backtest?

And, CL is still hanging around the SMA10.  USDJPY could go either way, but is headed for 103.16 if the purple TL ever breaks.

Even VIX, which has done all the propping today, hasn’t really broken down.

The risk of a breakout remains elevated.  But, my gut tells me we’re headed lower.

 

 

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