Two weeks ago I floated the idea that the USD, which had broken down below a long-term trend line and bounced, wasn’t done [see: The Rally That VIX Built.]  While the effects on equities would likely be muted by drops in VIX and a rise in oil prices, currencies were in for some significant moves.

Our thesis was that US economic data would continue to come in weak, and the USD would finally be able to tag critical support — the midline of a channel dating back to 2009 and the .786 line of another dating back to 2003.Yesterday, that move finally played out, resulting in a healthy sell-off in equities.  SPX, which reversed at our upside target on Monday, dropped to slightly below our downside target — a backtest of the large Inverted Head & Shoulders Pattern we’ve been tracking and a nice 30-pt short.With futures up over 7 points this morning, is the worst over?

continued for members...Note that SPX stopped on a dime on the purple .886 at 2419.86, another of our downside targets.  This was not by happenstance.  It got DXY and EURUSD where they needed to go.

EURUSD’s chart is still slightly ambiguous, with the white .886 and white channel top still a preferred turning point.  The white channel fits the highs better, while the purple channel fits the lows better.  If it remains above 1.1342, I’d expect it to rally just a little bit more to 1.1470.But, DX could conceivably reverse here and not look back… …having tagged the purple channel midline… …and the .786 of the much bigger white channel.I would be fairly confident in a rebound for USD, even if it’s accompanied by a continuing rally in EURUSD that produces a lower intraday low.

I still believe the case for any more rate hikes is, on least on the face of things, quite weak.  June CPI should come in even weaker than May.  But, I think the euro rally — supposedly on Draghi’s hawkish comments — is complete and utter bullshit.  Draghi hasn’t a hawkish bone in his body.  The euro rallied because the ECB engineered a breakout and the trend followers jumped on board.  Period.

USDJPY has overplayed its hand, as usual, and should be ready to tumble back to the falling white channel, now at 111.24.  But, it could easily postpone that move for a few more days.And, CL, which also got a little ahead of itself yesterday……is generally in line with the rising white channel.As always, VIX will play a part in whether or not SPX can maintain its initial gains.  Having broken out past the red TL yesterday, it ran smack dab into the yellow channel bottom and reversed (big surprise!)

It is now backtesting the red TL and testing the white channel bottom, the SMA10 at 10.52, the SMA20 at 10.46 and the SMA5 200.  A drop back through all of these would likely keep stocks in the green for the rest of the day week.I think it’s highly likely to break down, especially if EURUSD takes a run at 1.1470 and DX begins to suffer.

Re SPX: it has rejoined the rising purple channel which broke down yesterday — which is not terribly important in and of itself.  But, it’s a signal of how aggressively SPX will be propped up throughout the day.

An even better signal would be if it’s able to rise above the yellow channel top (2435ish) below which it fell yesterday.  Remember, this is the channel that SPX has broken out of many times, only to fall back in. I would also keep an eye on ES, which is back above its IH&S target at 2428.  We discussed the significance in yesterday’s post.UPDATE:  10:16 AM

VIX just dropped below its SMA5 200, meaning the breakdown might be at hand.  This will likely help SPX break back above the yellow channel top at 2435.  The next goal would then be to get it back above the SMA5 200 at 2437 and, then, the SMA10 at 2438.18. Of course, if EURUSD keeps levitating, VIX would do well just to keep SPX from giving up its place in the purple channel.That’s about all I have time for this morning, as I’m still on the road.  Looking forward to a quieter week ahead.

GLTA.