Oil’s Turn

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Last week’s declining CPI should have sounded alarm bells for investors betting on the reflation trade and higher interest rates. However, it marked a buy signal for oil. Given that oil prices are a primary driver of equity prices, and given that the current YoY picture indicates even lower inflation going forward, it’s time for a boost — which is exactly what’s happening this morning.CL has made a strong move, pushing back above the SMA200 and white channel bottom in a 3.40% pop on news that OPEC hopes to continue “constraining” supply in an effort to reduce inventories and raise prices.

That’s all well and good. But, the important thing is how the algos react. As the cash market prepares to open, the algos are liking the increase in oil prices very much.

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ES has already broken out of the falling white channel. SPX should join in and pop back above the SMA10. The odds of a reasonable .618 retracement that would involve dipping back below the yellow channel top have just declined by half.But, it mostly depends on CL, which is perched just above the SMA200. A rejection here could do a great deal of damage.VIX eased higher overnight, meaning it has plenty of room to decline when it counts — during market hours.And, even though it has clearly broken down, USDJPY is rallying in support of new highs.UPDATE: 9:43 AM

SPX has easily broken out of the falling purple channel and should challenge 2403 as long as CL remains above 49.21, VIX remains below 10.70 and USDJPY remains above 113.19.In algo terms, this is a layup. There is the potential for a reversal and backtest along the way, e.g. the .886 at 2401.35. Absent any troubling headlines, however, our upside targets of 2422.39 and 2449.64 are looking good.UPDATE: 10:04 AM

SPX has reached the .886. Technically, we could get a backtest here. So, shorting isn’t a terrible idea. I just don’t expect it to go anywhere. Rather, I expect they’ll prop it up until the SMA5 10 comes along to carry it higher. If it starts to fail, VIX needs merely to drop through the white channel bottom and/or the SMA10 at 10.39.Likewise, USDJPY can prop it up by pretending to or actually breaking out of the falling purple channel.UPDATE: 10:33 AM

For those who jumped on XIV last Thursday at 77.28 [see: See if You Can Spot…] we’re up about 5.25% (unleveraged.) With VIX at the white channel bottom, the easy money has been made. I suspect it’ll drop below the SMA10 and back into single digits, but there’s less certainty of that. If so, XIV could easily tack on another 5%. If not, there’s a gap to close back at 79.86. I’d consider establishing some mental stops here just in case VIX doesn’t drop through 10.47. CL is pausing here, and has backed off its SMA200….…which suggests at least a pause for SPX.UPDATE: 11:43 AM

In the aftermath of new highs, SPX is settling back below its SMA5 10/20 on a lack of follow through from VIX, CL and USDJPY. Note, however, that if VIX’s purple channel (proposed) midline holds, this slide should stop at the .886.

The May 8 new high was followed by a 7.5 pt slide, while the May 9 one was followed by a 22-pt one (to backtest the yellow channel top.) I suspect this will be a minor dip, but I’d keep an eye on VIX. If it punches through 10.66, we could get a more robust one.

Note that ES has still not made new highs — which argues for SPX 2406+.UPDATE: 1:39 PM

I have to take off early, today. Here’s a quick update on things. Again, I don’t think they’ll take their feet off the gas until ES makes a new high as did SPX. So, SPX 2406 still looks good. As before, keep a close eye on VIX and that SMA10 at 10.39. I’ll post some more this afternoon after the close. GLTA. UPDATE: 21:35

As expected, SPX’s slide was minor. It closed only 1.80 below its highs for the day. VIX’s white channel broke down, and the SMA10 was breached — though not held. ES came within 1.75 of new all-time highs and is currently positioning itself for the arrival of the SMA5 200.USDJPY held its “breakout” — though it looks likely to break down any second. The only troublesome sign at the moment is CL, which has dipped back below its SMA200 — though is still holding the red TL. If it reverses sharply here, today’s rally is likely to unravel and turn into another backtest. All in all, a fairly robust day that leaves SPX and ES in a strong position to rally up to and hold new highs. SPX support is now at the SMA10 at 2395.1 (the .618 is at 2395.42), the broken purple channel top at 2392.80 (also the white .500) and the yellow channel top at 2385ish. A quick heads up…I will post as normal in the morning but have to be out of the office between 10:30 – 12:30 or so.