The Trump Rally never made sense to me [see: Why the “Trump Rally” is a Fraud.] Yet, breakouts are breakouts, even if they’re driven by algo trickery and trend followers.
SPX’s breakout in November was driven by exuberant spikes in USDJPY, DX and WTI and a historic suppression in VIX, which is at a crossroads. If it’s to continue driving stocks higher — or even offset economic news that would see them correct, it must plumb new all-time lows.
Our recent bottom call on oil [see: June 20 Update on Oil] was offered with the understanding that it has a natural upper bound — particularly over the next month. And, the US dollar…well, it is flirting with danger. It dropped below very strong support yesterday.
continued for members…As we’ve discussed all week, a drop through support for DXY could be very hard on stocks, which have relied on it for support.
An intraday drop below support is one thing. But, it closed below support — which meant that SPX’s backtest turned into a rout.
Had it stopped at the yellow channel top, the uptrend would continue unabated. But, the drop back through it makes a dip to the 1.618 at 2391.8 a good possibility. I’m really surprised they didn’t hold off until Sunday, or at least overnight.
VIX has sold off strongly, but hasn’t committed to dropping back through the yellow channel bottom (11.30), the toggle between stocks rallying or selling off.
The BoJ is fine with oil rallying, as long as the yen is rallying enough to offset it. But, CL’s recent rally has been accompanied by a rally in USDJPY as well. This is untenable for the Japanese, who can’t accept even a whiff of inflation.
And, unfortunately, EURUSD hasn’t even reached out 1.1470 target yet. In fact, the longer it waits the worse the fit will be.
Oil is still ahead of itself and is now at strong overhead resistance with both the red channel midline and the purple channel .236 line and the SMA20. While higher prices have helped stocks quite a bit, they’ve set up a horrid June CPI print.
Fortunately, July will show a snapback in CPI as long as CL doesn’t do something silly like plunge in keeping with its fundamentals.
A couple of last thoughts before I get on the road…
SPX has backtested its purple channel at 2430. If it push back into it on this, the last day of the month/quarter/half year, then all is good. It’s back above the IH&S target, and life can go on as normal.
If it is rejected here, however, then 2392 looks very good. It would bring the total drop from recent highs to about 60 points, a total of 2.4%.
It would match the Apr 13 and May 18 dips in tagging the yellow channel .786 line, and it might even backtest the SMA100, currently at 2382 and rising. It could even be accomplished without incurring a SMA10/20 cross other than intraday.
To sum up, I’d be comfortable shorting here at 2429.45, but would watch carefully to make sure CL doesn’t break out, VIX doesn’t plunge too far/fast, and DX/USDJPY don’t start to reverse strongly. For now, it appears they’re content to let EURUSD reach 1.1470, even during trading hours, and that’s all the bears need at the moment.
But, keep your stops where you’re comfortable, because there’s a bullish case, too.
NDX reached strong support yesterday — backtesting the top of the white channel from which it broke out on Apr 25 and the red channel midline. Another selloff in SPX would imperil its bounce. If it drops back into the rising white channel, it could get very ugly.
GLTA, and I’ll see you all next week.