Decision Time, Again

We start this morning’s post with a peek at the Russell 2000 as it perfectly illustrates the dilemma facing the broader markets this morning.

Up until September 2017, RUT followed a well-defined rising channel shown below in yellow. Like all channels, it was defined by the tops and bottoms along the way. The only problem: The channel was rising only about 5% per year – hardly enough to get excited about. By late 2016, it had become obvious that algos had more influence than discretionary, fundamentally-oriented investors. The algos were, in turn, influenced by certain factors which central banks and their proxies could usually control quite easily. By wagging the tail (the factors) the whole dog (the market) would usually fall in line.

In September 2017, after RUT had been bumping up against the top of the rising yellow channel for over 9 months, the factors went to work and RUT broke out of the yellow channel and rose 21% over the next year. The slope of the new rising white channel was good for about 20% per year.

Everything was going well until September 2018 when RUT topped out at 1742 and plunged 27% in only three months. To make matters worse, the new rising white channel broke down and RUT fell back below the top of the yellow channel from which it had broken out.

It spent the better part of the next year trying to break out of the yellow channel again – failing seven times until Dec 4, 2019, when it finally shot above the channel top and remained there. There was a scare last month when, on Jan 31, it successfully backtested the channel top and bounced 5.5%.

Given yesterday’s carnage, though, it has fallen back to the top of the yellow channel where it faces that same important test all over again. If it holds, all is well and investors can go back to mindless trend following.

Even if it doesn’t, the SMA200 is now up to 1574, a modest 3.3% below yesterday’s close. But dropping through 1616ish would mean breaking down below the horizontal support (which served as overhead resistance between Oct 2018 and Dec 2019.) It could accelerate losses and complicate the rescue mission.RUT is typical of many of the indices and individual equities I chart every day. The Dow, for instance, faces a similar test at 27,700.And, SPX and ES completed important backtests (the purple channel top below) in the process of tagging our next downside targets yesterday.Given the way the factors are behaving this morning, there is a good possibility that we’ll see additional backtest targets such as DJIA 27,700 tested today. But, that would mean taking a chance on the algos’ ability to rescue stocks from some very risky waters.

Stay tuned.

continued for members…

The 10Y still looks iffy at these levels, especially as ZN didn’t quite reach its channel top at about 133’040.The 2Y is still well below 1.40% and the 2s10s is slipping lower.

Oil and gas are still undecided about making new lows, though the weekly chart suggests CL’s lows are in. We’ll want to keep a close eye on the little megaphone pattern on the 60-min chart…

…and on RB’s ability to remain above its SMA200. USDJPY has a little further to go before backtesting the red channel from which it broke out. It should be dropping like a rock, but is no doubt facing heavy selling pressure from the BoJ.

If EURUSD continues to bounce… …and USDJPY tumbles any more, we should see DXY backtest its broken white channel again — ideally as the SMA200 emerges.Note that NKD backtested its SMA200 as expected. This leaves SPX where we left off yesterday, backtesting the purple channel but with plenty more options if it breaks down. VIX has some important decisions of its own to make. GC is facing additional weakness after nearly reaching its IH&S target yesterday.UPDATE: 10:39 AM

ZN just reached 133’040, the top of the purple channel. If it pops through, the next resistance levels are 134’075 and 135’155. Will it pop through? TNX just made new lows but immediately pulled back… CL has reached TL support… and USDJPY has reached its backtest target.While DJIA is probably close enough for a legit backtest completion and RUT has overshot its backtest target. Stay tuned.

UPDATE: 1:10 PM

ES has reached our next downside target: the 1.272 Fib extension and SMA100. It’s possible it’ll overshoot a little so SPX can make an official tag too. But, sometimes SPX misses out and the SMA tag occurs only in retrospect the following day. Looking at RUT and DJIA, it’s more likely that we have a little more downside before the potential bounce (I say potential because I still like the SMA200 targets even better.) Also, TNX is back below 13.36, CL is breaking down again, RB is back below its SMA200, and VIX is pushing past its purple .618 – meaning there’s still an agenda at work. UPDATE: 2:11 PM