SPX reached both of our downside targets yesterday, closing slightly below our 2440.81 target at 2438.17. 
It was a nice 50+ point gain from our short at 2490.10 on Tuesday [12:18 Update], and came reasonably close to Wednesday’s forecast.
The slight overshoot did little damage to our rising red channel. Bulls are no doubt more concerned about inflation, which disappointed again in July. CPI came in at 1.7% (1.8% expected) and core remained at 1.7% (in line.)
As we expected, energy prices were key, turning in a 3.4% YoY increase.
Needless to say, traders are more skeptical than ever that the Fed will find reason to hike any time soon. The USD is sliding again — except against the yen, of course. The plunge in USDJPY lasted just long enough to facilitate a tag of the red .886 Fib.
Between that bounce and VIX’s reversal at the white channel top, futures are up over 10 points from their overnight lows. In other words, our expectation of a bounce appears to have been correct. The trick will be in maintaining it.
The USD might not be much help to stocks — though we do have two Fed speakers on tap to explain why a rate hike is still a great idea.
Instead, oil and VIX will likely drive whatever bounce we get, with CL having tagged our 48.10-48.16 target range overnight.
It’s a tough assignment, with headline risk still weighing heavily on real people and algos. As we discussed yesterday, if the rising red channel doesn’t hold, it could be a long way down.
continued for members…
The rising red channel and the implications of not holding it… 
VIX has plenty of room to fall — but, also plenty of buyers preventing its collapse.
We know where the BoJ stands on all this…
The prognosis is pretty clear today, remain long as long as SPX remains above the bottom of the rising red channel (2438ish.) Otherwise, don’t be bashful about shorting.
I have a meeting across town in 15 minutes, so will leave you with the above rather straightforward guideline and this unintentionally humorous email which popped up in my inbox overnight:
“Jerry” might find my 6’4″ stature inadequate. Or he might be worried that I’ll suddenly turn bearish after making a few percent on the short side this week. Not to worry. I’m sure TPTB will prop up markets today and keep the red channel intact — unless they can’t.
Either way, I’m certain we won’t have to wait 6 weeks to find out.
UPDATE: 2:50 PM
Not much movement so far, today. SPX bounced, then settled into a consolidation triangle as VIX failed to keep its initial drop going. No question there is plenty of selling pressure going into the weekend.
No one likes to think the unthinkable. But, as a money manager, would you rather miss out on a relief rally for a few hours or be stuck long and strong if the fighting begins over the weekend?
Yen strength continues to be a problem, as it translates into USDJPY weakness which, in the absence of help from elsewhere, translates into equity weakness.
CL would gladly step up its support, but is caught in the risk off mood — in addition to its already predetermined mandate to moderate inflation. More on this in the oil update I’m working on.
The Aug 2016 to Aug 2017 comparison already calls for a decline — unless they want higher inflation next month.
All things considered, I think I’d play it safe and go to cash here for the weekend. I’d like to think that VIX will plummet, USDJPY will recover and our channel will hold, but there’s little value in being a hero — especially with VIX edging higher as I write this. Only gamblers and those who can hedge should think about holding long over this weekend… as the whole world waits for the next telling tweet.
