Another day, another overnight ramp job to establish a little more cushion. Note, however, that the 2s10s continues to push the boundaries.

And, ES is coming up on a backtest of its SMA10 after bouncing 125 points off our channel backtest target.

Hold on to your hat.

continued for members…

As we discussed yesterday, a breakout in the 10Y or breakdown in the 2Y would put the 2s10s in a breakout situation – very dangerous for stocks.So far, that’s exactly what’s happening. Though the DXY is slumping… …on a euro bounce. …as USDJPY continues to “break out” in support of stocks.GC and SI are getting a nice bump off of DXY’s slide.And, CL and RB are closing in on overhead resistance.  CL has already backtest its broken purple channel and SMA10 and should pause or reverse here.RB has slightly higher to go before tagging its SMA10 at 1.087. The equities picture shows ES closing in on its SMA10 in a rising wedge.

And, SPX’s still clinging to the channel midline, undecided on whether to hold it or not. Last night’s ramp should get it to its SMA10 at 3367ish.Note that VIX has more upside if it decides to use it. I think it probably will, but perhaps after backtesting the SMA10 and closing its gap.

 

UPDATE: 10:10 AM

An update on this morning’s charts show ES and SPX testing their SMA10s (and SPX closing its gap) and VIX testing its white channel midline.

RB has reached its midline and SMA10, so I’d look to short it here along with CL.

 

COMMENTARY (cont.):

The biggest difference between this time and the 2016 election is that, regardless of the outcome, no one will be truly surprised. Sure, the polls all suggest Biden will win and the Republicans should retain the Senate. But, there are enough reasons to believe that Trump could win and that the Senate could flip.

So, it’s hard for me to believe that the Fed and PPT would have any greater difficulty holding the ES to a 4.5% overnight loss than they did in 2016. Note that VIX seems to be holding its SMA10/midline… …and ES, even though it completed a little IH&S targeting the previous H&S neckline, could drop 4.5% without even reaching my favorite downside target at 3198.

If I were in charge of supporting stocks at ES 3200, I’d draw a hard stop at DXY 91.358, USDJPY 102.38, VIX 45.18 and ES 3198/SPX 3170.63. At that point, I’d hammer VIX for all it’s worth and start selling yen hand over fist.

I’d leave CL/RB alone, as I don’t really want higher inflation expectations and a blowout in 2s10s – which I’d make sure sticks around 65-70 bps after the initial pop or drop. I expect both the 2Y and 10Y to drop, but the spread is unclear as we discussed yesterday.

If DXY leaked any lower to, say, 89.88, I’d goose USDJPY extra hard and crater EURUSD – sending DXY up to 106.28, making sure that GC doesn’t blow out any higher than 2162 nor SI past 35.17ish.

But, again, I don’t believe that any of the possible scenarios involving the presidency and Senate would result in as severe a reaction as in 2016. Is there another scenario that would? If the outcome resulted in widespread violence and rioting – whether Antifa, BLM, college kids, KKK or Proud Boys – I can envision a bigger drop than 4.5%. If Trump were to lose the election but surround the White House with trigger-happy militia loyalists, that would also probably do it.

Pick a scenario, any scenario. There’s a worst case version of it out there that would hammer stocks beyond what the prospect of higher taxes next year would mete out.  That’s why I think the best approach is the one I always recommend: be cautious in the overnight or weekend and either rein in your risk or be prepared to short if important support gets taken out.

GLTA.