It was over five months ago that I first suggested our current analog [see: A New Analog Aug 3, 2016.].  It was unlike many of the past ones in that it suggested a tortured path to higher prices.  As of yesterday, we were within 1% of our upside target, with today being labeled a likely high.

The most notable development overnight was that USDJPY finally broke down.  To paraphrase Ron Burgundy, this is kind of a big deal.  After a month-long very steep post-election ramp job, and another month of less-steep ramping, this is a trend break that shouldn’t be ignored. Will we get another gasp higher as our analog allows, or is the party finally over?

continued for members…

USDJPY’s drop is a function of the dollar’s weakness.  Note that it fell back below the purple midline today.

CL jerked higher, and is holding above the SMA10.  EIA inventory is due out at 11:00 ET this morning, delayed by the holiday.  Expectations are for a 2 million barrel draw versus last week’s 0.6 million build.  Yesterday, API reported a 7.4 million barrel build for the week ending Dec 30.

VIX is edging higher, but has room to dip to 11.2-11.36 without too much fuss.SPX and ES are perched at the top of continuation patterns.  All that’s needed is the continuation.

At present, it looks like both are likely to sell off on the open, with ES off 2.5 points just before the opening bell.SPX has support at the red channel bottom at 2263-2264 and the SMA10 at 2259.62.  It closed yesterday just above the purple channel bottom, and should drop below it on the open.

UPDATE:  9:34 AM

ES dipped below trend, but bounced right back up.  If it breaks out of this falling white channel, we should get higher highs.  Otherwise, not so much.

So far, VIX is supporting the idea of a breakout.

If it were me, I’d nudge VIX lower for the next hour, then smack it down below 11 at the same time that I release a doctored EIA report showing much lower inventories that sends CL spiking up near 55.  That would be enough to break ES/SPX out, and a backtest of USDJPY up to 117.3 would be enough to keep them edging higher.

UPDATE:  10:00 AM

After breaking out, ES is struggling to maintain its momentum.  I’d hold long as long as ES can hold the SMA5 200 at 2262.75ish, but keep a close eye on CL, which is still edging higher towards its .618, and VIX, which is backtesting the falling white channel and getting a slight bounce.

UPDATE:  10:22 AM

ES just reentered the white channel and tested — yes, again — the SMA5 200 (now at 2262.65.)  It’s a good reminder that bulls aren’t out of the woods and to watch those stops.  We have only a few minutes left if SPX is going to tag the red channel bottom at the .786 at 2265.22.

UPDATE:  10:31 AM

ES just dropped back into the channel, so I’m back to short here for 2265.22 — if it can get past the SMA5 100 at 2267.59.  If the red channel should fail, I really like the SMA5 200 where it crosses the gray channel top at 2258.44ish in the next hour or so.

This was precipitated by USDJPY making another lower low, VIX bounding off the white midline and falling white channel backtest, and CL reversing off its .618 — all more than the algos could bear.

Here’s an updated SPX chart with those targets mentioned above.  Needless to say, the bulls will try to hold the red channel.  

UPDATE:  10:58 AM

VIX sinking and SPX holding at SMA5 100 — even as USDJPY continues lower.  I’d cover and go long on any move through the SMA5 10 at 2269.25.

UPDATE:  11:03 AM

A 7.1 million barrel draw should be bullish for CL, but it’s selling off at the moment on news that gasoline supplies grew by 8.3 million barrels.  CL is about to test its SMA10 and .382 at 53.31.  If it can bounce here, then all is well for the bulls.  If not, the next support isn’t until the SMA20 and purple channel bottom at 52.60 — which would probably allow SPX to reach  the red dot at 2258.46.

UPDATE:  12:16 PM

SPX almost reached the SMA10 and SMA5 200 before bouncing higher — a bounce which just pushed above the SMA5 10.  I’d close the short here and revert to cash until we get another downward catalyst — perhaps the SMA5 20 at 2264.50ish.  Swing traders might be okay holding short, as this is likely a premature bounce.  But, these days, you just never know.

The .618 and gray channel tags would be nice, but it’s unclear whether or not SPX is done.  It clearly put on the brakes in order to allow the SMA5 200 to reach the SMA10 before tagging them both, so it’s doubtful.  Will it rebound here?  Maybe.  A higher high isn’t completely out of the question, but we’d need strong rebounds in USDJPY and CL and a big drop in VIX.

VIX has reached its SMA5 200 and has started to reverse.USDJPY continues to slide, but not precipitously.

Interestingly, RUT has reentered its falling white channel after breaking out and tagging its .886 yesterday.  Pretty wild ride…

And, DJIA ‘s rising purple channel is breaking down ever so slightly.

UPDATE:  12:20 PM

If it’s going to reverse and head lower anytime soon, this is the spot.  Back to short with very tight stops.  Note that ES, which only reached its SMA20 and not the 10, has reentered its falling white channel — a little more than a backtest — hence the tight stops.

Note that NKD also missed an opportunity to tag its SMA10 after running into a key .786.  

UPDATE:  12:57 PM

I have to step away for 20-30 minutes.  This feels more like a delaying tactic than an actual bounce higher — except that CL is spiking back above its SMA10.  VIX certainly hasn’t broken down, and USDJPY is still settling lower.  So, it seems like we’ll get another leg lower.  Just hard to say with CL bouncing like this.  Any higher than this and I’d probably go to cash.  Any higher than 2268.29 and I’d want to be long.

My expectation continues another leg lower to 2259.62 or so, which is also about where the ES SMA10 sits.

UPDATE:  1:57 PM

Not much happening… except SPX is at a place where it needs to commit.  The implication is to be long on a breakout, and short on a breakdown from right here.  It seems as though the algo crowd was aiming for 2258.46 – 2259.62, but the CL folks got a little nervous at CL 52.79 and started the bounce early.  Once it starts, how do you turn it off?  So, now SPX has to abandon the obvious support tag, pretend it never happened, or come back and make a last ditch plunge near the close to get there.  

If they had simply waited for the SMA20 tag at CL 52.60, SPX would have reached support and everything would be tied up in a nice, near bow.  This is one of those days when it would nice if TPTB would simple announce the high, low and close for the day ahead of time!

At this point, I’d let the SMA 5 20 be the guide: long on top of it, short below it.

UPDATE:  2:58 PM

This is getting really old.  SPX just dipped briefly below the SMA5 20, so there’s a very good chance we’ll get a backtest of the purple channel.  Back to short here, but be ready to revert to long if/when it pops back above the SMA5 20.  And, don’t be surprised if it settles down to 2263.4ish at the close, where it can backtest the SMA5 200 and the “broken” purple channel.  

I’m increasingly comfortable with the idea of a top already being in — though a big spike into the close for a new high wouldn’t surprise me.  My suggestion: stay with the momentum and let that SMA5 20 be your guide.  I’m going to take a lunch break, will be back before the close.

UPDATE:  3:53 PM

Coming into the close and it’s kind of a dud – no hints one way or the other.  My bias is to the downside here based on USDJPY’s breakdown and the awful CL inventory data.  But, I certainly can’t rule out a last gasp slightly higher tomorrow. Another backtest of the broken purple channel could exceed 2277.53 at the open in the morning.

I’d short into the close if you can handle the gap risk and/or hedge.  Otherwise, I’d go to cash at the close and wait for the “market” to announce its intentions.

 

 

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