Futures are flat as we approach the open, off from their overnight highs as VIX crept back above its SMA10 moments ago.  At least the sharp rebound answered the question we had regarding the timing of this correction.

continued for members…

It isn’t likely to be a quick plunge all the way to SPX 3956. It is much more likely to wait until the SMA200 crosses the 3.618, likely around the time the next CPI data come out.

That means a lot more zigs and zags for ES…

…and VIX. So, from here out, we’ll be trying to decide what each factor is likely to do (1) in anticipation of a big selloff, (2) during the big selloff, and (3) in the wake of the selloff.

The “anticipation phase” will likely consist of allowing the factors to settle into a gradually more bearish position. While the “selloff phase” usually means a quick jolt to a point of very strong support (USDJPY and CL) or resistance (VIX.) And, of course, the “wake phase” will mean causing a sharp recovery by bouncing off that support/resistance.

Fortunately, we have a pattern for these things based on past such situations. In July 2018, CPI reached 2.95% – a troubling development at the time. It was precipitated by a sharp YoY rise in the price of oil/gas which was instrumental in getting SPX up over its 2.24 Fib.SPX had recently topped the 2.24 in Jan 2018, but fell back below it and had bounced off the SMA200 for its next attempts which required about 6 months to “take.”

Although CPI backed off a little bit over the next few months, the price of oil/gas continued to rise until October, finally topping out when Jamal Khashoggi was killed by the Saudis and we gained enough leverage to insist that oil prices retreat.

With the decline of oil, however, equities took a hit and the “backtest” was on. The goal was no doubt to try and catch stocks at the SMA200, which by then was above the 2.24 Fib. It went well…until it didn’t. The 10% correction turned into a 20% correction.

This time, we should assume that they learned from their past experience and will do it with a little more expertise. I’ll be working over the remainder of the day and probably into tomorrow to see what went right, what went wrong, and how I would do it differently were I in the Fed’s shoes this go round.

I suspect the market will behave itself for the most part over the remainder of the week, with VIX dancing around the SMA10 to keep things from falling apart just yet.  Next week could be a different story, with loads of important economic data coming out. Anything that points to an increasing need to taper could be hard for the market to digest.

My plan is to take tomorrow off, but I’ll be back to post more if anything exciting happens. Also, just a reminder, I’ll be on a very light schedule starting next Wednesday due to travels that will last into the following week.

GLTA.