If you enjoyed Wednesday, you really enjoyed yesterday’s algo-driven meltup too.

VIX, USDJPY and CL engineered a striking recovery and reversal.  ES put in a low which should help define a rising channel, then rallied strongly into the close.

The recovery was driven by VIX, which suddenly collapsed down through the red TL and SMA5 200 shown below…

…USDJPY, which spiked higher into the US equity close…  …and CL, which bounced off the channel bottom it was backtesting.

continued for members…

Based on the futures action, we should see SPX pop up to its SMA10 at 2504.12 and then retreat — a classic pop and drop.  This would allow it to construct a bullish inverted Head & Shoulders pattern that targets 2661ish — just shy of the 2017 close at 2673.

There’s no guarantee we’ll get the requisite right shoulder.  Many times, the algos can’t contain themselves and simply continue melting up.  But, if USDJPY’s minor channel breakdown back below its .886 is any indication, an IH&S is the goal.  I would fade the initial spike and look for a pullback to at least the white midline, currently around 2462.  A more symmetric right shoulder would be to the channel .236 line and yellow channel bottom at 2448ish.

We’ll know it’s happening when ES drops through its SMA5 200, currently at 2495.80.

UPDATE:  1:00 PM

So far, so good.  We could get the backtest any time, or it could be delayed until as late as tomorrow morning.  ES’ target looks to be 2460-2464. 

Note that a reversal here will require that VIX hold at its SMA10.