The term “overhead resistance” refers to a price level that should be difficult to rise above.  When I wrote my first post back on May 2, 2011, it was to note that trend lines and Fibonacci patterns indicated an approaching top that might be difficult for SPX to overcome.  As it turned out, May 2 was the top, and we saw a substantial correction of 21.6% that was touched off by a beautiful shorting opportunity that fulfilled an analog forecasting the drop to the very day and dollar [see: Analogs.]

We’ve had many additional shorting opportunities over the years where overhead resistance proved potent enough to provide substantial shorting opportunities.  In April 2012 we were rewarded with an 11% short after a Butterfly Pattern completed [see: All the Pretty Butterflies.]  A few months later, in September, we nailed up a 9% correction courtesy of another important Fib level [see: The World According to Ben.]Another fun one was in May 2015, when SPX came within 4 points of our long held upside target at the 1.618 Fib extension at 2138 [see: The Last Big Butterfly.] This one was worth a healthy 12.5%.It was followed by a 14.5% correction in November when the rebound completed a Bat Pattern [see: Beware the Bat.]There have been countless other levels of overhead resistance that: (1) provided meaningful opportunities for traders to short; and/or, (2) warned of substantial declines for buy-and-hold types.

At times, however, important overhead resistance has simply melted away.  The 1.272 extension at SPX 1823 was an important Fibonacci level that should have smacked stocks for a minimum of 13.5% in late December 2013.

Instead, SPX virtually ignored it until after the fact — when it was backtested an astounding seven times over the next two years.  It was irrelevant as resistance, but incredibly important as support.

Once SPX broke through the 1.618 extension at 2138, it’s been off to the races.  The next important Fib level is the 2.24 extension, which is 2703 for SPX and 2728 for ES.  As we’ve been discussed the past few days, we’re there.It required a bit of gymnastics (and, loads of help from the algos) but SPX gapped up through its 2.24 on Wednesday and ES tagged its just yesterday.  Both moves required a resurrection of broken down channels.  And, both have left us wondering whether or not there’s any integrity at all left in the “markets.”Overhead resistance is still relevant.  But, it has increasingly become a test of the extent of the manipulation being exerted.  There is little that can’t be accomplished with well-timed ramp jobs in USDJPY or oil or a severe smackdown in VIX — particularly against a backdrop of record setting stock buybacks and central bank accommodation that continues a full ten years after the crisis.  When we see SPX gap through important resistance like this, we have to wonder whether market integrity has reached its own overhead resistance — whether it has failed its moment of truth.

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I wanted to title today’s post “Snow Job” in honor of yesterday’s FOMC minutes.  But, it felt a little snarky, even for me.  If you haven’t read the minutes, here’s a quick synopsis:

We don’t understand why inflation’s not at 2% yet, but we’re going to continue to raise rates anyway. We will continue to raise rates until we decide not to. The economy might get a bump from the tax legislation. But, odds are the corporate tax savings will go toward M&A and more stock buybacks [bigger bubbles!]

Stocks might have been buoyed by the comments, but the real story was the latest collapse in VIX (-19.4% since Tuesday night) — a collapse which has come in handy as DXY’s FOMC minutes rally lasted all of 30 seconds. It’s now continuing its slump toward our next downside target.

As we’ve discussed, the big question is whether it can catch support here at a key channel line and Fib level. The answer lies with the S&P 500 futures.While SPX reached and shot through its 2.24 extension (of the drop from 1576 to 666 between 2007 and 2009), ES is till 7 points away (2728.79.) If TPTB pull out all the algo igniting stops today like they did yesterday, we’ll see it leapfrog through 2728 and usher in another few months of melt-up.

If, on the other hand, ES reverses off the overhead resistance, it’ll be because USDJPY, CL and RB stop ramping and VIX is allowed to bounce up to where it belongs at 16.12.  Which will it be?

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An increase in short-term interest rates is traditionally viewed as bullish for the dollar. Yet, take a look at FOMC rate hikes over the past year.  Each was followed by a strong decline in the dollar index (DXY.)  When the FOMC declined to raise rates, on the other hand, DXY usually rallied — at least temporarily.

The FOMC made no secret of their plans to raise the discount rate.  So, naturally, we can surmise that front-running played an important role in the price action.  But, does it explain the continuing slump that, so far, has nailed each of our downside targets without fail?

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There’s a disconnect between the reported and the true inflation rate.  We’ve touched on this many times over the past year.  And, I think this is key.  The FOMC is well aware of the actual issues — rent, health care and fuel/gas prices.  Gold investors/speculators are aware, too — as witnessed by its recent surge.

So, despite the fact that CPI and PCE perennially report inflation to be under control, it’s not.  The FOMC gnashes its teeth over the failure for PCE to reach 2%…but, maybe to justify continued dovish monetary policy.

The real objective can be seen in the relationship between DXY and SPX.And, as we discussed last week, the problem lies in the chart below.  With TNX about to break out, we can expect continued weakness in DXY.  Needless to say, this will present difficulties for the yen carry trade crowd and, ultimately, equities.As SPX approaches its next key Fib level, and a backtest of the recently broken white channel, I suspect the dollar’s slide isn’t over — with our targets at 88.423-88.682 the next major support when it breaks below September’s lows.The 2.24 extension has been hanging out there ever since SPX broke through the 1.618 in the wake of the US election — when the full court press involving USDJPY, CL and VIX manufactured (for the first time ever) 12 consecutive months of positive gains.If it pushes through the 2.24, the next Fib resistance isn’t until the 2.618 at 3047.34 — only 12.6% higher than current levels.  If it can’t, then the first real support is the bottom of the gray channel, currently around 2588.

And, if that fails, then the SMA100 is currently around 2560 and the SMA200 is around 2485.  Neither of them currently lines up with any significant chart patterns, so it’s difficult to feel very confident about those downside cases in the near term.  But, the MAs are on the rise, so we’ll reevaluate in a few weeks.I’d feel much more confident if DXY would continue dropping, taking the USDJPY with it, and CL and RB would stop rallying to support the equity regime.

GLTA.

ES’ latest rising channel broke down rather decisively on Friday.  ES closed well below its SMA10 and almost tagged its SMA20 — a feat it hasn’t accomplished since Nov 20.This morning, the futures have pushed back above the SMA10, hinting at a full recovery.  Yet, as we’ve discussed, there are several factors that might prove problematic for the bulls.

First and foremost, it’s a New Year.  With a 20% gain in the bag for 2017, might we see stocks at least pause to catch their breath?  If nothing else, it might alleviate some of the incredulity surrounding 2017’s record-breaking ascent.

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The spread between the 10-yr and 2-yr has now narrowed to 50 bps — the same level it was when stocks peaked in October 2007.  Many take this as a harbinger of financial disaster. Is it?

Flat or inverted yield curves typically signal a recession.  And, it’s hard to argue the point.  Investors would have to be pretty pessimistic if they’d rather tie up their money for 10 years at a rate lower than shorter-term instruments offer.

The yield curve inverted just before the recessions of 1981, 1991 and 2000.  And, it inverted about two years before the 2007-2009 GFC.  But, as the chart below shows, inversions and market peaks haven’t always lined up that well.

In 1998, a brief inversion occurred about two months prior to the 22% correction.  In 2000, we saw the same two month lead time but this time the inversion lasted 11 months and stocks plunged by over 50%.The curve inverted again beginning in late 2005 and bounced around for quite a while before going positive in May 2007.  Five months later, as the curve was rapidly steepening, the S&P 500 peaked and began a 57% crash.

The other significant selloffs since then — Apr-Jun 2010, May-Oct 2011, and May 2015-Feb 2016 — have occurred with positive curves that were either in the midst of flattening or about to flatten sharply.

The current levels are, indeed, equal to those at about the same time as the market peaking in Oct 2007.  But, in 2007 the curve was rapidly steepening.  Today, it is (not quite as) rapidly flattening.  I’ve highlighted a similar move in 2005 (from 1.34 to .57) for comparison purposes.

Note that in 2005 the rate of change was even greater that it has been this past year.  But, it still took another 8 months to invert and another 22 months for stocks to peak.

While admittedly a very simplistic exercise, I believe the above shows that while the potential is there for a recession, this is just an early warning at this time.  If the yield curve bottoms out here and rapidly steepens, we’ll have a lot more to worry about.

Stay tuned.

 

 

As we expected [see: Dollar Duldrums] the US dollar has continued to slide.  Today’s price action threatens to take out the November 27 low and reach our 91.483 target.

Today, we’ll update some key currency pairs and see if we can make sense of the bond market.

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Stocks remain in a year-end holding pattern, meaning they’re getting plenty of support from algos.  SPX had a shot at its SMA10 yesterday, but seems undecided between its 2.24 extension at 2703.62 and a backtest of its SMA10, currently at 2675.41.  It’s a whopping (sarc) 1% spread which simply won’t make a difference.Things could get interesting if SPX drops through its SMA10.  But, after all the pushing and shoving it took to get here, is that likely?

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Wishing all our members a peaceful holiday season and a joyous new year!

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This past year was challenging in many ways.  Despite record highs in the markets, poverty, food insecurity and homelessness have not gone away. About half the world population lives on less than $2.50 per day.  Eighty percent live on less than $10 per day.

We Americans are accustomed to discussing poverty in other nations, particularly “third world” countries. But, in America — the richest country in the world — about 12.7% of us live in poverty.  For children, its more like 15.6%.

If this shocks you, take a few minutes to read a special report in The Guardian.  Philip Alston, UN special rapporteur on extreme poverty and human rights, shines a spotlight on the 41 million fellow Americans living in poverty.  With important safety nets being pared back or eliminated, it’s hard to envision an improvement in the coming year.

No one can do everything.  But, everyone can do something.

Until shortly before he passed away last Christmas at age 86, my Uncle Don was still delivering meals to the elderly through Meals on Wheels in Bucks County, PA. I’d like to honor his memory in some small way.

Between now and Jan 30, we’ll donate 10% of all new membership sales to Meals on Wheels.  In addition, we’re offering discounts on memberships to anyone making a contribution to this or any other bona fide charity offering services to the poor, the hungry and/or the homeless.

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If you saw this on an EKG, you’d call the time of death and wheel the patient down to the morgue.  The horizontal lines below are, from top to bottom, the 200, 100, 50, 20 and 10-day moving averages.  And, I can find no other time in VIX’s history when they were all arrayed in this order and this perfectly flat.But, this is VIX and these are the “markets.”  More importantly, the holidays and the end of the year have arrived.  And, the underlings lucky enough to be working today are under strict orders not to do anything that will screw up the S&P 500’s 20%+ gain for 2017.

ES has held the purple channel bottom again, RB has seemingly broken out of and backtested a falling channel, CL is defying fundamentals and threatening to break out, ditto for the USDJPY, and the euro has barely budged despite the Catalan crisis.

Sure, core durable goods and new orders dropped in November, and personal savings just hit a 10-yr low.  But, stocks are steady.  And, corporations just got a big Christmas bonus with which to buy back even more shares in the year ahead.  So, everything is peachy.

Despite the above, our targets remain unchanged for ES, SPX, VIX, RB, CL, DXY and EURUSD.  Our stances and forecast targets are listed on the current forecast page.

 

 

VIX’s 200-day moving average just registered a 10-handle for the first time ever, dropping to 10.99 this morning… … in order to keep S&P futures in their recently re-acquired rising purple channel.  We saw another test just yesterday (the yellow arrow.)As we discussed last week [see: The Chartist’s Dilemma] this channel dates back to August 17.  It has broken down on multiple occasions, always springing back to life when resuscitated by timely plunges in VIX.With the year-end just ahead, will the excesses of the past year prevail or are stocks finally ready for a rest?

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Despite a pregnant pause, RB is clinging to a slight gain at the moment (+0.18%.)  This is where it should reverse if it’s going to.It all boils down to whether or not the ytd gains are “enough.”  SPX is sitting right now at a 20.03% gain, which might well be the bogey that was in mind.  It seems unlikely TPTB would want to give up such a noteworthy achievement at this late date.ES’ purple channel is a rising subset of and about to intersect with the top of the rising white channel from Jan 2016.The white channel is, in turn, a parallel subset (the bottom .236) of the large rising purple channel from 2009.The white channel top will either serve as an upper limit to ES or will serve as a point of breakout.  The white channel itself is rising around 15-17% per annum — well above the historical rate of return for stocks, but well below the small purple channel’s 32% per annum.

The cycling of VIX — bashing it from higher levels to near the lows or making new lows — will continue.  Obviously, VIX can’t drop below zero.  RB and CL can only go so high before inflation becomes a problem.  USDJPY can go higher, but this means a less valuable yen and higher inflation for Japan.

Interestingly, the BoJ announced just yesterday that it’s leaving its monetary policy on hold because of difficulty in reaching its 2% inflation goal.  Inflation obviously won’t remain in the basement much longer if oil prices continue to rise while the yen drops.

So, we’re likely looking at a reversal for USDJPY (strengthening yen) to compensate for an oil and gas breakout — at least over the next few weeks.  DXY certainly supports this thesis.

I’ll review the devil’s advocate case for a higher USDJPY and other levitating techniques in the days ahead.

UPDATE:  12:40 PM

In an effort to push SPX and ES above TL resistance… …and, to offset continuing DXY weakness……as well as USDJPY resistance……CL and RB are breaking out.  CL could run into TL resistance at 58.43…

…and, RB has reached Fib resistance at 1.7458.

To complicate things, VIX is being bid.  Might there be some real live investors out there who are nervous about remaining 100% long at all-time highs over the holidays?As we discussed last week, the CL and RB breakouts could have consequences for CPI.  So, I’m tempted to regard this as a head fake.  But, if USDJPY and DXY tank as expected, we could be looking at the real thing — at least for the next month or so.

Stay tuned…