I suggested last October 10 [see: Welcome to Peak Oil] that oil, then at 51.60, would need to fall significantly to avoid nasty YoY CPI comparisons in Feb 2017.  Recall that CL reached 26.05 on Feb 11, 2016 — so Feb 10, 2017’s close at 53.85 was roughly a doubling over the course of that year.

As it turned out, CL did drop sharply — dropping 18% to 42.2 by Nov 14.  But, TPTB were quickly reminded of what I had been posting about for months: CL had taken over primary responsibility for driving equity algos.  Having driven SPX almost 20% higher since Feb 2016, CL’s decline was now dragging equities lower.It was SPX’s second such dip below the midline of a large rising channel (yellow arrow below, the first being Brexit) and the Central Planners wanted nothing to do with the bottom half of that channel.  The day after the US election, CL joined with USDJPY and VIX in trying to convince investors that the election results were a good thing [see: Why the Trump Rally is a Fraud.]

Everyone knows the rest of the story.  Oil ignored huge inventory builds and rallied through the end of the year to new highs — enabling SPX to do the same.  Even after the channel that carried it sharply higher for two months broke down on Jan 9, CL managed to limit its losses to 8%.  Even after January’s CPI numbers came out at 2.5% on Feb 15 — due largely to oil and gas — it still bounced back, almost to its previous highs.

That was then…and, this is now.  We’ve been expecting a divergence between RBOB and CL, and the past few days has not disappointed.  It seems TPTB have reached a compromise that will enable gasoline prices to drop back to an acceptable level without CL participating in as much downside.

RBOB rallied sharply along with CL and, well, everything else in November — suggesting a new, faster rising white channel and avoiding our original white target at 1.4855.  Yesterday, RBOB closed below its SMA200.  This morning, the white channel broke down.  RBOB might just find its way back to the red channel after all.

Much of it, of course, has to do with what SPX has accomplished over the past couple of weeks.

continuing…

We’ve been waiting for a backtest for SPX and ES of some important  Fib levels.  I believe we might finally be to a point where TPTB will find it acceptable.  Yesterday’s rise above the purple channel top was just plain silly.  The yellow channel is rising at around 15%/year as it is.  I do believe they’ll want ES to maintain its breakout above the rising purple channel — currently around 2310 — 80 points or 3.3% below its current levels.  The big question is whether they’ll wait for it to cross above the 1.618 Fib at 2338.87 — only 2.1% below — or allow the drop to occur right away.

It could go either way.  And, from the looks of things, it is underway.  SPX dropped through the red and purple midlines this morning, so I’d continue to hold short and see how it shakes out.  

RBOB has support at 1.60.  But, if it drops 7-8% or so to 1.52ish, it might mean CL drops out of its rising red channel, which would be hard on stocks.  But, given the gains they’ve made over the past two weeks, it might be an acceptable loss. And, USDJPY stands ready to race up to 120.11 or above in order to help prop stocks up if need be.

UPDATE:  11:37 AM

Getting close to our initial target at the bottom of the red channel and the SMA5 200 — around 2379.93.  So far, CL is off 1.65% and RB by 1.9%.  VIX is accommodating, by bouncing on the purple channel bottom.  But, it hasn’t made it up past the yellow channel bottom, so there’s potential support for equities as long as it stays below 12.03 or so.  There’s obviously a big gap to fill at 2371.54.  So, there’s always a chance the red channel bottom doesn’t hold.

UPDATE:  12:05 PM

Quick update on things…adding in the lower target at 2371.21, though 2367.89 would match up better with ES.

Next stop for CL should be the red channel bottom around 52.16.

UPDATE:  12:55 PM

An alternative — a kinder, gentler decline.

UPDATE: 3:18 PM

SPX just dipped below the SMA5 200.  It has room to reach the gap close by the closing bell, but we would normally expect a bounce here — especially since it’s been dodging the SMA all day long. I’d play the bounce, but be prepared to reshort with any dip back below the SMA.  

Note that VIX plunged 10.9% intraday to a lower low just to postpone this moment that might otherwise have occurred at 2381.  Why?  Odds are it’ll make the rest of the drop either at the close or tomorrow morning.  If SPX bounces here, it could stay in the falling purple channel up to the SMA5 100 at 2390ish.

CL continues to slip — off  2.15% currently.  RB is off less, at -1.74%.

USDJPY still hasn’t rolled over.

UPDATE:  3:34 PM

I think SPX is going for it today.  I’d revert to short with very tight stops here into the close.  Note that a drop to 2371 would result in a drop of over 1% – a psychological target given the criticism over the extent of the manipulation.

But, keep an eye on VIX.  If it starts plunging, back to cash.

UPDATE:  3:51 PM

An alternate channel that crosses the .618 at the close and reaches 2371 early tomorrow morning.  But, I like the idea of a 1% loss on the day to 2371, dropping through the bottom of the red channel.  If we get there or beyond it to, say, the .786 at 2367.89, I’d probably go to cash for the night.  It looks as though VIX is going to backtest the yellow channel.

If it stops here and/or bounces a few points into the close, I’d be very tempted to hold short overnight.  ES, CL and USDJPY all have good potential downside here.