Two charts best define the day we had yesterday.

First, VIX tagged our next highest target: the intersection of the .786 Fibonacci retracement and the trend line connecting two previous highs.

The other one was the SPX arithmetic (as opposed to log) chart, which stopped on a dime at the channel bottom.The bleeding continued well past the Fed’s ineffectual $1.5 trillion injection and had to wait until the low-volume aftermarket to be staunched. At that point, central bankers went to work – pumping oil and gas, the dollar, interest rates and currencies in order to restore confidence whip up the algos. It worked…at least so far.

I’ll have a separate post up later regarding COVID-19, including my latest projections for the US.

continued for members…

ES is lock limit up pre-market, but will keep going after the open. The key is the weekly SMA200 at 2595ish.

For SPX, the arith chart looks much better than the log chart, which clearly broke down. The biggest moves continued to be in the currency pairs, with the euro still getting crushed after its breakout was killed off. This has enabled DXY to make a stunning jump of 4%.It hasn’t hurt that the BoJ got into the action, devaluing the yen by a good 7% since tagging our 101.23 target.After a sharp selloff yesterday, gold is showing a slight decline. As we’ve discussed, this is likely a timing issue as the IH&S and .786 targets are further along the rising white channel.

When everything is melting down as occurred yesterday, selling gold is one way to meet margin calls. I think the liquidity issue will pass, and gold will eventually rebound. However, it might wait until after the SMA200, currently 1497 and at the white channel midline, is backtested.As discussed yesterday, the BoJ will also increase ETF purchases in addition to pumping an addition 1.5 trillion yen into the system.Like all the other central banks, it’s a desperation move. But, all they care about at this point is holding that channel bottom.  Otherwise, we’ll see much lower equity prices all around the world.

Oil and gas are bouncing enough to make a difference – but, it’s hardly an impressive bounce. CL is back inside the rising white channel after its ill-timed breakdown yesterday.And, RB is back above its 2016 lows, for now at least.The bond market is extremely interesting. 10Y rates continue to bounce off the yellow channel .236 line, with ZN back below the 1.272 and likely to backtest the former highs at 135’155. The 2Y has rebounded somewhat, reaching 0.51 a moment ago. But, the rise in 10Y yields has been much sharper, thereby continuing to steepen the 2s10s spread.

Remember, it’s not inversions that cause crashes. It’s the sharp spike in the 2s10s which follows inversions. These are easily detected – they’re the breakouts past significant resistance.  The 2s10s has broken out past the red TL and the purple TL and horizontal resistance.  It is coming up on the last significant resistance, the TL connecting 2s10s former lows.It’s more easily seen on the weekly chart.  In 2000, the meltdown accelerated once 2s10 went steepened past 0 and again when it broke the yellow TL.  Ditto in 2007-2008. Once 2s10s pops up past the white TL – around 48-50 bps – it has officially broken out and stocks’ decline should accelerate. This is the most important chart to watch from a macro standpoint. Given the likelihood of the Fed cutting short-term rates even more next week, the spread should continue to steepen.

UPDATE:  11:44 AM

The rally is fading fast. Note that SPX has two important targets just below current levels: the purple .618 and red .886 at 2414.97 and 2465.93 respectively. There is also an overlap between the white .382 and Dec 2018 lows at about 2346-2354. If SPX were to fall through all this support, our favorite target of 2138 gets the green light.  It’s significant that VIX is pushing through the .786 and closing in on the .886. The tenuous situation with CL, which now sports a well-fitting channel:UPDATE:  3:55 PM

Going into the close and VIX just broke below TL support.

SPX is about to close yesterday’s gap and could close above its 2.24.CL has held its channel… …and USDJPY has backtested its SMA200, so should reverse here. The 98.99 target still looks appealing, which would do a number on stocks.It’s a pretty positive rebound, regaining yesterday’s losses.  So, am I now bullish?  Not yet. The 2s10s is sitting at 48.7 bps – right at the white TL we discussed earlier. If it retreats on Monday, stocks get a reprieve.  If it continues higher, stocks should face further downside.