Let’s face it.  The reflation trade is dead.  It’s not that we don’t have inflation.  It’s just that the way in which inflation is reported in the US makes it appear not to be a problem.

Not only does this save mountains of moola on cost of living increases, it makes it much easier for the Fed to keep interest rates at historic lows (very important when you’re in hock to the tune of $20 trillion.)

Keeping this thought in mind is important when it comes to predicting what the Fed is going to do, say, next week.  And, it has sure come in handy when forecasting the price of oil, gold, the USD, etc. (oil nailed our next downside target overnight.)

Now, the $64 trillion question: if the reflation trade is dead, what about the Trump Rally?  It seems stocks have been operating in another universe — where earnings, geopolitical events, and macroeconomics no longer apply.

Regular readers know that I’ve poo-pooed the Trump Rally from the start [see: Why the Trump Rally is a Fraud and Central Banks and Markets for starters.]  It was built on a foundation of a historic crash in VIX and spike in USDJPY.

No doubt, some fundamental investors piled on, buying the idea that Trump could bend the laws of mathematics to his will (lower taxes and increased spending without increasing the debt/deficit.) Others correctly reasoned that such an exercise would produce inflation, which is usually a good thing for at least nominal, if not real, returns.

And, a considerable number of trend followers jumped on board once key technical levels were taken out.  But, the fundamental crowd has probably realized, by now, that there’s a difference between campaign promises and signed legislation.

If reflation isn’t, and the fundamentalists lose faith in Trump’s magic, what’s to keep markets ratcheting higher?

continued for members…

I keep coming back to the three old reliables: CL, USDJPY and VIX.

We saw CL reach our next downside target this morning.  It’s quite possible that it’s the bottom.  Equities ran into trouble when CL dropped below the purple channel bottom in order to reach the white .886.  They recovered when CL rose back above the purple channel bottom.  As a central bank market manipulator, what else would you need to know?  If I’m right, and I think I am, CL is a buy here at 45.20.  The only problem is that July’s YoY comparison will look pretty inflationary by comparison.  But, that’s August’s problem.Then, there’s USDJPY, which came close enough to our next downside target to consider it a tag.There are some longer-term channels to consider here, too. The yellow channel below is parallel to and therefore an extension of the rising purple channel.

When USDJPY spiked higher after bottoming in 2011, it marked a strong recovery for SPX, too.  When it broke out of the falling white channel in 2014, stocks broke out to new highs.

SPX suffered when USDJPY topped out and fell between Jun 2015 – Jun 2016 to backtest the broken white channel.  Since then, it rallied furiously to support stocks in the wake of Brexit and, again, in the wake of the US election.  But, SPX only made new post-May 2015 highs when USDJPY climbed back on top of the yellow channel midline.  This is important, because USDJPY just tested the midline again.  In other words, USDJPY might have very strong support here, too.Another dip to 107 in September (the yellow dot) might reinforce the validity of the rising white channel.  If it hasn’t bottomed yet, it might get one more bottoming candle next week when DX finally completes its carefully managed decline to 96.14.  This unfinished business on DXY, along with the strong possibility of a spike in EURUSD to 1.1470, reinforces the idea of one more quick plunge — though it might be safer to try to avoid it in the first place.This leaves VIX — which has no accountability to any principles of economics whatsoever.  It’s currently locked in a falling channel of sorts — though it keeps threatening (but, failing) to break out.Would it shock anyone if it continued lower in this channel?  I’m not sure it even needs to test the former lows.SPX is currently making its way lower in a small, falling purple channel that terminates at the SMA10 and/or the rising yellow channel top.

We’ve talked about this channel top quite a bit. There’s no guarantee it will ultimately hold.  But, it’s clearly been an important bogey for TPTB in their efforts to effect a lasting breakout.If, for whatever reason, the yellow channel top doesn’t hold in the wake of next week’s Fed announcement, there are two important levels of channel support to consider.  The first is where the SMA100 intersects the rising purple channel at about 2360-2365. This would be a fairly mild 2.7% decline from current prices.  The second would be a backtest of the broken white channel at around 2236 – an 8% plunge from current prices.  The purple channel midline passes through it on Jul 14 — but, would involve SPX dipping below the SMA200 which, by then, should be around 2300 (currently at 2271.36.)

Intraday plunges can and do happen.  But, a 64-pt intraday plunge would be one for the record books. So, I think a dip of this type is considerably less likely.

If it were to happen sooner, say next week after the FOMC decision, we’d been looking at a 42-pt dip below the SMA200 — still pretty substantial.

UPDATE:  2:30 PM

SPX spent all day avoiding the falling purple channel like the plague.  Now it’s backtested it and a rising red TL from yesterday as VIX is approaching its SMA5 200 and USDJPY has bounce support at a channel midline.  We could get a bounce here, but the key will be whether or not VIX can remain above its SMA10 and CL above the purple channel bottom. Note how many times ES has been saved from dipping below its IH&S target at 2428.If VIX breaks above the SMA5 200 and the white channel top, then SPX 2422 should be easy.UPDATE:  2:47 PM

Next level of support, as VIX has reached its white channel top.  If it tops 10.40 and USDJPY keeps dropping through its SMA5 200, SPX has more to go. However, ES just reached 2428 again, so SPX could be done falling.  I think it’ll keep going, but keep your eyes on VIX, USDJPY and ES – which has recovered from 10 previous tags or near tags.UPDATE:  3:44 PM

There’s a clear path, and VIX is in a perfect position to help it get there.  Will they allow it?  Not if the guys managing ES have anything to say about it.  Make that 11 bounces.