ES and SPX safely tagged their backtest targets yesterday, scampering back to safety by the close.  Around 2:40AM, however, ES’ channel looked to be in trouble again.  ES even dropped through its SMA5 200 – a no-no in any meltup scenario.

As luck (not!) would have it, someone in the administration (not Trump, we know he never watches the markets) was watching the markets at 4AM and slipped a note to Bloomberg that trade talks were going well.  The yellow arrow marks the spot. All the stops have been pulled out: VIX is back below its SMA200, CL is back above its SMA200, and USDJPY got a bounce off its SMA50.  And, just like that, all is well again.  For now.

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We’ve been waiting for what seems forever for the 2.618 Fib backtest [see: Melting Up.] It took 8 sessions to break above it, and 14 sessions since it was last tagged. Now, two sessions later than expected, it’s finally here.

What next? The usual V-shaped rebound to meltup, or does something more sinister lie ahead?

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The ramp job of the past six months started after SPX had broken down below the 200-DMA in June.  It subsequently saw a breakout of the falling white channel, four additional near tests of the 200-DMA, a backtest of the falling white channel, a breakout of the rising purple channel, and, last week, a breakout of the rising white channel.We’ve documented the many gimmicks, tweets and fake news blurbs used to accomplish these breakouts.  As of today, there’s nothing left to break out of — just 21 more sessions before the end of the year where the market must decide whether the breakout was the real deal or just an enthusiastic overshoot.

Clearly, holding the breakout would be a major coup for the bulls — which is why ES has tested and held that level 10 times in the past 3 sessions. If it doesn’t hold, it changes things quite a bit.continued for members… (more…)

Loads of positive economic news this morning — which might just upset the “Fed put” narrative.  Durable goods was the biggest beat, coming in at +0.6% versus a consensus drop.  But, the gains came from government/defense orders.  Core goods continue to disappoint.

We’ve been watching for a crack in the meltup, with the next few days vulnerable from a timing standpoint. If 3145 breaks, we could finally get a (barely) meaningful backtest.

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Watching the market over the past few weeks reminds me of the Foreigner classic Feels Like the First Time:

It feels like the first time
Like it never did before
Feels like the first time
Like we’ve opened up the door
Feels like the first time
Like it never will again, never again

In this case, the torrid love affair is between algorithms and the things that make them feel all tingly “down there.” As in the song, it’s not the first time…not even close.

Algos love it when VIX breaks down. The logic is clear: fear must be subsiding for a reason, so buy-buy-buy!  And, boy, has it subsided.

It’s not the actual levels to which VIX drops that excites the algos – it’s the trend changes and broken support. SPX made new highs in April because the purple trend line from Nov 2017 broke down.  It made higher highs in July because VIX broke down again, pushing below the TL over and over again.

Only this time, it reinforced the establishment of a new trend line (shown in red.) Because that trend line is also now breaking down, algos are bidding stocks up to new higher highs. Imagine what would happen to stocks if VIX were hammered below 11.03, 10.17 or Nov 2017’s 8.56.

The algos could care less that the tail is wagging the dog.  All they know is the tail is wagging.

Likewise, USDJPY keeps whispering sweet nothings to algos. In this case, it’s the 200-day moving average producing all the oohs and aahs.  USDJPY first soared back above it on Oct 14 in the wake of the exciting (not) Phase One trade announcement.

It so titillated the algos that it keeps going back to the well over and over again — just like those trade updates from the White House. One wonders whether it might go blind.Oil futures, the algos’ Desdemona, have adopted a similar technique, popping up above their 200-DMA all but one session since Nov 4. If they looked closely, the algos might realize CL is resetting most nights and, like USDJPY, hasn’t made any actual progress.  Ah, but what is love if not blind?continued for members… (more…)

Futures have ramped 9 points higher on USDJPY’s latest test of its SMA200 (16th out of the last 21 sessions) and VIX’s latest test of trend line support (11th out the past 19 sessions.)  In other words, nothing new.

But, if the charts are right, stocks are merely setting up for a surprise dump.

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Backtests, that is. Even since stocks the Phase One non-deal was announced, stocks have been in desperate need of a backtest of some of that resistance (now support) they leap-frogged.  But, it hasn’t been easy.

Now, there are sudden, gut-wrenching backtests.  And, there are slow, boring backtests. Though we’re almost certain to get one, the challenge is knowing when.  If we are going to get a gut-wrenching one, it’s time — last night’s ramp job notwithstanding.

Consumer sentiment is coming up at 10. Stay tuned…

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During the Oct 11 Oval Office press conference in which Trump announced the Phase One China trade deal, he mentioned the words “40 or 50 billion” seven times (five times in the first two minutes alone.) He encouraged farmers to “go and immediately buy more land and get bigger tractors.” In addition, an agreement was supposedly reached regarding structural agriculture issues, currency, foreign exchange, technology transfer, etc.

It was a joyous moment, except that no one in the room can be seen smiling. Not one. Though Trump used the word “deal” six times, the Chinese vice premier studiously avoided mentioning the word, saying only that “we have made substantial progress in many fields” and “we will continue to make efforts.”

The only problem? It was total bullshit – not that the algos cared. Stocks broke out of the bearish Head & Shoulders Pattern they were completing and raced out to new highs. Ever since then, ES has been locked in a tight acceleration channel which is gaining about 5 points per day, almost 1% per week.

Trump’s most notable quote from the press conference was the following non-sequitur:

Every time there’s a little bit of bad news, the market would go down incredibly. Every time there was a little bit of good news, the market would go up incredibly. And, yet, other news, that was also very big, the market just didn’t really care. They just seemed to care about the deal with the USA and China. And, that’s okay with me.

It was his acknowledgement of what we all know: markets are responding to “news” of the deal which is very clearly not yet a deal — 629 days since the “trade wars are good and easy to win” tweet:

Trade wars have obviously not been good (especially for farmers who went out and immediately bought more land and bigger tractors) or easy to win. But, it has been easy to ramp the market higher with tweets, chopper talk and leaks to friendly reporters every time the algos got distracted by disappointing economic or earnings news — aided and abetted by a Federal Reserve which is treating current conditions with the same urgency as the greatest financial downturns of the past 100 years.

As we noted yesterday, the market has yet to decide whether to remain in the channel or backtest some important Fibs. Look for oil, VIX and USDJPY to continue calling the shots and for the White House to continue managing the process.

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We’ll get a chance today to find out what so unnerved the FOMC in October that they lowered fed funds rates to 1.50-1.75%.  This level was last seen in March 21, 2018 (when SPX was 13% lower.) At the time, the FOMC was still raising rates in the wake of that sharp 12% correction.

In terms of cuts, though, the last time was in Oct 2008 after SPX had shed 20% on its way to a 58% crash in the midst of the Great Financial Crisis.  The time prior to that was in Dec 2001 with SPX off 27% during the 50% dot-com bust in the wake of 9/11…Rates also dipped this low during WWII and the recessions of 1953 and 1958.

Prior to that, though, you have to go all the way back to January 1931 when the Dow had plunged 55% on its way to a 89% crash in the midst of the Great Depression.

This latest meeting will also be known as the start of Not-QE – the resumption of inflating the Fed’s $4 trillion balance sheet.  This series of cuts and the restart of QE is being billed as a non-event.  But, if history means anything at all, it ain’t.

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Futures were off as much as 14 points overnight, but are making a comeback. It remains to be seen whether we’ll finally get a backtest of the 10-day moving average and whether will prompt an emergency meeting of the Plunge Protection Team.continued for members… (more…)

Futures melted up an additional 10 points overnight, largely on another VIX test and USDJPY buoyancy.With ES’ SMA20 nearly at the 2.618 Fib extension and the overhang of two channel tops, we could finally see the pullback discussed yesterday.  If not, it’s a different path all together.

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