More Than A Pit Stop?

Stocks were well on their way to a breakout over the holiday weekend, a common enough occurrence — when reality demanded a pit stop (hydrogen bombs and impending ICBM launches can have that effect.)

S&P futures dropped 20 points from Friday’s highs by the time they reopened Sunday. Even after a concerted ramp job, things still looked dicey for today’s open as of a couple of hours ago. The rising red channel had broken down and hinted at a corrective C-wave down to 2450ish.But, that was before the algos got busy. Now, with 20 minutes till the open, a breakout is solidly back on the table. As one reader pointed out the other day, what’s it going to take for stocks to sell off?Glad you asked.

continued for members…A quick scan of the markets shows USDJPY and CL both still with plenty of downside potential. Even VIX has rejoined the rising purple channel and is back above its SMA200.But, CL is bucking the trend and is threatening to break out (it won’t.)

Therefore, the lower targets for ES and SPX are, again, suspect. Even though ES just about tagged its .886, SPX came up more noticeably short. Is it a realistic target?

Judging from COMP, TPTB might be thinking of ways to jump it all-together.It will come down to CL and VIX. Given that NK is a lot closer to Japan than Guam, the yen should have great difficulty selling off any more.

And, while the Fed would love to see CL selling off right now, its rally is one of the few bright stops for the algos — unless they can manage to get VIX back below its SMA200.

Take a look at the CL chart, again. This is a slightly altered closeup of a chart I posted a couple of years ago. Note the solid white line running through its midsection.

That’s the bottom of a huge channel that looked very legit until 2015. At that point, CL broke down and recovered over and over again. It’s back below the channel bottom, but could also be viewed as backtesting it. Even if it can poke through again, the SMA200 awaits at 49.54.The first test for SPX will be the SMA5 200 at 2470. If that doesn’t hold, then the red channel bottom is around 2465. If that breaks down as well, there are several SMAs around 2450-2453. And, if all those break down, then we can start looking for last week’s pre-ramp job downside targets of 2415 and 2353.

UPDATE: 10:42 AM

CL just completed the backtest, and SPX just backtested the red channel bottom. For SPX to bounce, we’d need to see CL break out. UPDATE: 11:24 AM

USDJPY continues to sell off, VIX has broken out slightly, and CL has had trouble breaking out. Add it all up, and we have a test of ES’ and SPX’s .618s. If it doesn’t hold, note that SPX has a gap to close at 2460.31, and then not much until the SMAs between 2450.33 and 2453.34.

UPDATE: 12:34 PM

SPX just tagged its SMA10. I’d look for a bounce here, but would be ready to re-short if it doesn’t. The white channel backtest is currently at about 2441.70 and the red TL is at 2436.30. UPDATE: 9:50 AM

Note that COMP is coming up on its SMA10 which is also the SMA60 200. I think SPX will at least tag the white channel top at 2441.70.

If it can postpone the last leg until tomorrow morning, it could conceivably tag the intersection of the red TL and the white channel top at around 2438.50. If it bounces back above the tangle of SMAs, though, it’ll be pretty tough to get it back down there.I’d keep a close eye on VIX. It’s making new highs. If it falls back below last week’s 13.59 high, we could get a more serious bounce.UPDATE: 1:55 PM

That should do it for the bounce. ES has backtested its SMA10. The only hitches are that VIX is sliding and SPX is back above those SMAs, so we’ll want to see confirmation — a drop back through them. Anything north of 2454 represents a break out of the falling white channel — a good place for stops or at least careful scrutiny.

Remember, it’s quite common for the termination of one of these sharp declines to occur as a backtest to a broken falling channel — often after tagging the SMA5 50 — another argument for the decline to extend until tomorrow.

UPDATE: 2:31 PM