Friday started off like so many other sessions, with algos working overtime to counteract the effects of the British election.  Our first upside target at 2438.44 was quickly dispensed with.  So, it was with some trepidation that I suggested another turning point an hour later at 2444.83.

Here’s the next opportunity for SPX to top out if it’s going to.   Note that ES has also reached a key Fib. I believe it’s worth taking a shot at a short with tight stops.

SPX slipped a couple of points higher before the rug was pulled out, prompting a 30.5-pt plunge that exceeded our downside target by 4 points.  Follow that up with a 16-pt rally into the close, and a return to some semblance of normalcy by VIX……and it’s no wonder that traders are a little rattled.  In reality, things went pretty much as they should have; it just took a little patience.

BTW, for those who missed it earlier, we gained some nifty insights into the Plunge Protection Team from our recent NDX update.  Check it out.

continued for members…

The futures suggest more downside, which is the message sent by USDJPY as well.SPX backtested the yellow channel top.  Though, as we’ve discussed, I think it might have another leg down coming Wednesday on further dollar weakness.  As to today, I’d look for 2408.45 – 2412.71.  But, if 2420 holds, we could get the usual bounce into FOMC day which would take SPX back up to 2436-2439.

CL continues to bounce as expected.While, DXY continues slipping… …and, the EURUSD bouncing.Looking ahead this week, I continue to believe there’s an excellent chance that the Fed will punt on the widely expected rate hike, and that DX will drop to 96.12, EURUSD will spike to 1.1470, and USDJPY will plunge to 108.83ish.

The dollar weakness should ding stocks, but it’s all in the timing.   I like the SMA100 near the purple channel bottom at 2365ish quite a lot (white dot.) If that doesn’t hold, then we’d be looking at the SMA200, currently at 2275, or a full backtest of the broken rising white channel at 2240ish (yellow dot.)

The common theme behind all of our currency targets is that they represent strong channel and Fib support.  If central banks put much effort into a reversal there, especially by USDJPY, then they should be able to prop up SPX wherever it happens to be at the time.

In my mind’s eye…if the FOMC doesn’t raise rates, the currency moves should occur swiftly. CBs will go into full support mode.  But, then, Janet Yellen will begin her press conference.  I suspect she’ll be extremely dovish, citing the weakness in commercial real estate and autos, the geopolitical risk in Europe and the UK, etc.

By the time she’s done talking, the slide might be arrested, peace and harmony restored.  But, we won’t know until it happens.  It’s also quite possible that real investors will overwhelm the algos as sometimes happens, and we’ll get some serious follow-through.

If I’m completely wrong about all the above, SPX is still above the yellow channel top and can go on to new highs.

UPDATE:  10:01 AM

This is the support we’re looking for.  If we’re going to get the usual pre-FOMC day meltup, this is the spot where it should start. I’d cover here on expected an expected VIX reversal and re-short if it drops back through or can’t bounce through its falling SMA5 10/20 up around 2425.  Note that VIX’s SMA200 is just above at 12.75. UPDATE:  10:29 AM

SPX just reached its next hurdle: the SMA5 20 and is reversing a bit on VIX’s bounce at its white channel midline.  If it’s going to bounce over the next day or two, it should pick up support at the SMA5 10, probably with help from VIX dropping through the midline and testing (or breaking down through) its SMA 50/100 at 11.67. 

The next overhead resistance would be the SMA10 at 2427.38 – probably as the SMA5 50 comes along at 10:50ish.  If VIX bounces here, we’d want to revert to short for another leg down. Note that USDJPY reached a small scale .618 earlier this morning, and has plenty of room to backtest for the next day or two if they want to build a little buffer against potential downside. And, CL is in an excellent position from which to “break out” — again, if they so desire.The counterargument for a bounce, of course, is that The Street sometimes puts on a show of displeasure with whatever the Fed is rumored to be doing (remember the Taper Tantrum?)  In this case, if stocks underwent a nasty correction leading up to Wednesday, when a rate hike is widely expected, it might scare the FOMC into holding off for now.

Obviously, this theory is in conflict with the higher USD / higher SPX mechanism.  But, we’ll see.  That’s the beauty of having several tools with which to prop up stocks.

UPDATE:  11:03 AM

SPX is testing the SMA10.  I’d revert to cash here, and be prepared to short if SPX doesn’t remain above the rising SMA5 10 and revert to long if SPX pushes through the SMA10. The key should be VIX, which is hovering just above the SMA50/100 discussed earlier.  Will it bounce or drop through to force SPX higher? UPDATE:  11:11 AM

VIX is testing a TL from Friday and SPX is anticipating a break down.  I suspect SPX will pop through 2427.38 (on a VIX breakdown) to test the SMA5 200 at 2433.99, but I’d want confirmation first.  UPDATE:  11:33 AM

SPX looks to be failing to break out here at the euro close, but VIX is still in position to break down and CL to break out.  USDJPY continues to be a drag – testing the .618 again.  At this point, the mostly likely scenario for SPX seems to be a test of the SMA5 20 as it nears the red TL around 2424.90 followed by a breakout as VIX breaks down below its SMA50/100.  But, keep an eye on SPX as its SMA5 20 approaches. UPDATE:  11:55 AM

SPX is breaking down some here, but VIX has yet to confirm — meaning there’s a good chance it’s a head fake.  For anyone shorting, keep your stops tight in case VIX suddenly plunges.  SPX has about 10 minutes to dive to the .886 and be in line with the two previous lows (the white channel.)

I have to leave, now.  But, for those trying to play SPX, in general I’d be long above 2427.38 and short below the red TL at 2424.80ish.  But, I would absolutely use VIX to confirm either move.  And, even then, I’d be wary of head fakes.  Upside target is the SMA5 200 — currently around 2433.28.  The initial downside target is 2408.45-2409.20.

UPDATE:  3:37 PM

SPX has, so far, managed to remain in the falling purple channel that was (supposedly) broken last week.  SPX has tested the yellow midline 3 times today, and VIX kept it from dropping through all three times.  Note that VIX dropped through the SMA50/100 and is now approaching its SMA5 200. Nothing has really changed.  The downside and upside cases remain unchanged.  We could still get a sell-off into the close, which might clarify things a bit.  Otherwise, the risk remains that TPTB will drive SPX higher in advance of the FOMC meeting.

My bias remains in favor of the downside case, but I’m not so confident that I’d recommend holding short unless you can hedge or handle the potential gap risk.  The presence of its SMA5 200 at 2431 means SPX could pop up out of both falling channels at any moment.  The presence of VIX’s SMA5 200 at 11.36 reinforces that possibility.

If you can’t handle the gap risk or hedge, this is a good time to go to cash for the night.

GLTA.