A week ago today, SPX tagged an important Fib target that would have been a perfect turning point were it not short of the 200-DMA.  As we noted at the time [see: The Red Zone] a reversal without tagging the 200-DMA would have been highly unusual.

There have been no instances of SPX approaching but failing to tag its 200-DMA since January 2003. It would also be easy to prevent.

First, SPX’s SMA200 is just above at 2741.55. It seems unlikely that SPX would come all this way just to whiff at such an important target.

Second, SPX has obviously pushed back above major support at the 2.24 and the H&S neckline.

Last, if VIX spikes higher, won’t USDJPY or CL/RB just come to the rescue?

As things turned out, SPX backed off just enough to tease bears: a 57-pt drop over the next three sessions.  At that point, SPX had dropped enough to flesh out a sharply rising channel from its Dec 24 lows.

More importantly, DJIA had tested and was in danger of dropping through its own 200-DMA.  Clearly, it was time to prop up equities.  And, that’s exactly what happened.USDJPY, CL and RB came to the rescue, ensuring that SPX regained its 2.24 at 2703.  And, VIX — which did initially spike higher — was hammered (-58% so far) after Mnuchin convened the Plunge Protection Team, giving stocks all the support they needed to come back and test the Feb 5 highs.Once SPX tags its 200-DMA, is it safe to assume it will be able to maintain its momentum?

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It was a close call but, in the end, bulls prevailed.  As we are reminded by those lovable Legos (yes, they’re back) everything is awesome!

VIX is back below support and SPX’s rising channel is intact.  The Dow, the market’s best barometer of bullish interference, is back above its SMA200.  See if you can spot the turning point.With futures currently up 10 points, will the market mind when oil and gas continue plunging this morning?  We’ll see.

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The past two weeks in the market have been a lot like the Superbowl game: not much excitement as things crept toward a seemingly inevitable conclusion.  Now that SPX has reached the red zone, are the bulls about to score?

ES came within .54 of our primary upside target this morning……meaning that SPX is quite likely to tag our favorite upside target of 2732.47 at or near the open.VIX has cooperated, dipping below the SMA200 to tag both our targets: the yellow channel bottom yesterday and the gray channel bottom overnight.  If the bears can get a turnover, this should be an excellent entry point for vol.continued for members… (more…)

The algos are still in charge this morning, on pins and needles over VIX, currently threatening to drop through its SMA200.Meanwhile, CL and RB are taking care of their backtests ahead of the open, leaving ES/SPX perfectly positioned for its next knee-jerk move.

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Does it matter if market leaders, some of the biggest market cap stocks in major indices are tanking?  Does it matter if earnings and guidance are, more often than not lately, disappointing?  Do the algos even care, or are they perhaps mesmerized by the fact that VIX is back below its 200 DMA? How excited might they get if it slips below horizontal support at 16?Meanwhile, the bond market — which might ordinarily be nervous over this morning’s strong employment report — is correctly concerned about inflation that’s too low.  As we’ve discussed often over the past 4 months, the sharp slide in gasoline prices has knocked the legs out from under inflation concerns and, therefore, the rationale for interest rate hikes.

Yes, AMZN is stumbling this morning.  But, like AAPL, it was careful to stumble only as far as the nearest support.  In other words, the bulls might not be quite done.

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Anyone playing the “patient” drinking game while watching Powell’s press conference has quite a hangover this morning.  To no one’s surprise, the FOMC statement and Powell’s comments were dovish. The algos were quite pleased, rewarding the Fed’s awareness that inflation is no longer a problem.  In the wake of the oil and gas crash, the new problem is deflation.  How the Fed handles it this go ’round will determine what to expect from stocks.

If you’ll permit a small pun, the bond market is well ahead of the curve.

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Everyone has their own opinion about what the FOMC will announce today.  Let’s see what the charts are saying.

The 2s10s continues to tighten, closing yesterday at 13.9 bps — extremely close to a .886 retracement of the rise from -0.19 to 2.91 between 2006 and 2011. Is the Fibonacci .886 important?

It mattered a great deal in Feb 2006 when the 2s10s reversed very close to an .886 retracement of the runup from -0.52 to 2.75.  And, as we’ve discussed many times, it’s not the flattening of the yield curve that deflates stocks.  It’s the rapid steepening.

The 2s10s is also sitting at the bottom of a falling channel and a falling wedge — both of which also suggest a reversal. Having said that, the 2s10s recently broke trend to the downside again.  Per our yield curve model, a drop through the yellow TL spells trouble for stocks.  A breakout above the red TL is also bearish.

About the only bullish move would be to consolidate through late February without making new lows or breaking out.  By then, it will have to choose one or the other.Both the 2Y and the 10Y have been sliding since oil and gas prices peaked on Oct 3.  Our premise, which proved correct, was that oil and gas would slide sharply to prevent inflation and interest rates from pushing to a level that upsets the markets: 3% for CPI and the 10Y.With YoY comparisons in gas prices (the most volatile and immediate impact on CPI) going negative, CPI should be much closer to 1% than 2% in the next month or so. Without at least a minor recovery in oil and gas prices, CPI could fall to or even below 0%.

As a result, the FOMC obviously cannot justify further rate hikes.  In the absence of a recovery in oil and gas prices, there is a much better chance of a rate cut.  All else being equal, the decision will likely rest on whether the oil and gas price declines persist or prove to be transitory.

Central banks have managed the fallout quite well so far.  The EURUSD, which has looked likely to bounce up to its SMA200 ever since October, has instead waited patiently for the SMA200 to come to it.As a result, DXY has held up remarkably well… …and, TNX is well behind the curve in reflecting plunging CPI.This has produced a nice bounce in ZN since our bottom call in October, with more upside likely ahead.The trick will be how to accommodate such a move without trashing stocks.

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