Dire Straits

Watching the latest action, I’m reminded of a little known, but great song from Dire Straits:

Dire Straits: The Bug (click to watch)

Between the soothing, dovish tones emanating from Bullard and Kudlow and the warlike tone of our Tweeter-in-Chief, it’s hard to know whether the market is the windshield or the bug. Is the bulls’ plan coming together, or are they about to lose it all?

As expected, ES backtested its SMA10 and the channel from which it broke out on Wednesday. Currently off 22, it’s not enough to allow SPX to do the same.

SPX’s SMA10 is at 2625.29, 37.44 below yesterday’s close. In other words, to construct a proper IH&S, ES should return to its overnight lows — which means VIX tagging our upside target and maybe finally getting those moves we’ve been waiting for in CL and RB.

But, as we’ve seen, unleashing VIX isn’t always a good idea. With the SMA200 not all that far below current levels, is it worth the risk?

In any case, it appears that yesterday’s thoughts were on target.

SPX looks like it’s pushing above last Thursday’s highs… So often, TPTB miss opportunities to construct IH&S Patterns — helpful in that they result in much less firepower being needed to produce/extend rallies. FWIW, there will be another opportunity at 2671.

The bulls should be really, really careful as the backtest unfolds (2612-2625.) A failure there could translate into a drop to new lows. And, if things get really ugly, remember this chart from More Where That Came From: