We’ve had multiple target tags the past few sessions, with the latest being CL – which just reached our upside target.  The chart below, from our Oct 3 Update on Oil, illustrates the timing issue TPTB face with CL’s rise from February.

As discussed yesterday in Welcome to Peak Oil continued rise will certainly help support equities, but it would result in higher year-over-year inflation measurements — which would strengthen the argument for higher rates.So, from here on we’re on breakout/breakdown watch.  CL, USDJPY, VIX, DX…they’re all in a position to do one or the other.  And, don’t forget about DB, which reached our 13.88 target yesterday: the 61.8% retracement of its latest plunge.continued for members… (more…)

The term “peak oil,” per Wikipedia, is the point in time when the maximum rate of extraction of petroleum is reached, after which it is expected to enter terminal decline.

To yours truly, it refers to the point in time at which oil prices must begin to decline lest their effect on inflation become problematic. Today is that day.

To understand the significance, we have to go back to Jul 2014. USDJPY, the primary driver of stock prices via the yen carry trade, broke out (yen declined) after a protracted consolidation [for more: see What Really Drives Stock Prices?]  Having the yen rapidly drop in value might have produced inconvenient inflation in Japan, which imports all of its oil.

Fortunately, there was one simple way to cope with it: crash the oil market. As the chart below shows, the two events were simultaneous. CL plummeted from 107 in Jun 2014 to 26.05 in Feb 2016 as USDJPY shot higher.

When USDJPY reached 126, however, it ran into overwhelming overhead resistance and began a precipitous decline. Stocks, which had relied on an ever-rising USDJPY, were not amused.

In fact, every time USDJPY dipped below the critical 120.11 level (dotted yellow line below), SPX fell off a cliff.   The Powers That Be needed a new way to prop up “markets.”To TPTB’s delight, they discovered they could manipulate the price of stocks as easily with CL as they had with USDJPY.  Remember, a dropping USDJPY means the yen is appreciating.

So, rising oil prices were acceptable to both Japan and the US which, given the recent declines, had plenty of leeway to allow prices to “recover.” Indeed, a recovery was necessary in order to prevent another round of bank failures.

On Feb 11, CL bottomed as expected at 26.05 and nearly doubled over the following four months.  Stocks also recovered sharply, even as USDJPY dropped like a rock.

By now, you might be thinking “this is all well and good, but what does it have to do with peak oil?”

Simply put, today marks the one year anniversary of the beginning of CL’s last plunge: from 50.92 on Oct 9, 2015 to 26.05 on Feb 11, 2016.  Given where CL is now, every tick higher will theoretically manifest in higher inflation (year-over-year.)  Now, consider where it would need to go in order to avoid such inflation.  That’s right, back below 30 (not likely, as it would crash equity markets all over again.)

Again, inflation would be a most inconvenient development for central banks which have used the threat of deflation to justify quantitative easing and other unprecedented intervention in financial markets.From here on, TPTB must either: (1) resign themselves to higher inflation going forward, which would ultimately necessitate higher interest rates and thus crash equity markets; or, (2) rev up the yen carry trade again; or, (3) find a new carry trade to keep equity prices on the rise.

Is it any surprise that USDJPY recently broke out of the falling red channel it’s been in since Oct 2015?We remain long from 2147.65 on Oct 4, with last week’s upside target price unchanged.

GLTA.

 

 

 

 

 

 

The short answer: not much longer, as I’ll explain below.

Our forecast remains on track, despite the unnerving chop and deteriorating news flow.  The latest: the British pound, which flash crashed yesterday despite the supposed control of TPTB.We remain long from 2148.63 on Tuesday.

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Running a little late this morning, so two quick charts right up front.  Everything I posted yesterday still applies.

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Just a quick post this morning.  Yesterday, ES nailed our downside target from Monday, meaning SPX slightly overshot its at 2144.01 vs 2147.65.

The drum I’ve been beating this week still resonates this morning.  CL topped its Aug 19 highs.  This suggests a break out, though it’s still early in the day.continued for members… (more…)

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Today, it’s all about oil — which reached our next upside price target yesterday.  I know, I know. Most investors are focused on how the ECB and German government will bail out Deutsche, or what Evans and Lacker might have to say, or even the NY ISM data.  And, I’d be shocked if oil even makes any headlines, today.

Still, it’s the most important chart I’m watching at the moment.  As I noted in yesterday’s Update on Oil, whether or not it breaks out or reverses at this point will determine not only where stocks go for the next few months, but whether or not the economy is able to muddle through.

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In our last update [see: Aug 30, 2016 Update on Oil] I noted that CL had bounced prematurely, leaving the channel it had broken out of without a backtest.  It was at 46.20 at the time.

…the delay left the falling white channel without a backtest… To further complicate things, DX and USDJPY just broke out.  Is it possible the yen carry trade is being resuscitated and CL will be allowed to decline further?

If so, then we’ll likely see it drop down to 43ish over the next several weeks (the red dot in mid-September) to tag the white channel bottom and, potentially, the white .618 Fib at 43.07.

As it turned out, the yen carry trade was resuscitated.  USDJPY rallied over 4% between Aug 26 and Sep 2.  This left CL free to decline without seriously dinging stocks.

CL did more than backtest the white channel by mid-September.  It dropped through the channel top, tagging 43.07 (actually 43.00) only two days later.  As expected, it got a tremendous bounce at that point — gaining 11% in the next week.

Not surprisingly, not one client complained that the forecast came together so quickly!  But, the rapid rebound left me with a charting quandary.  By coming when it did, the bounce left CL without a solid tag of the rising channel from Feb 11.

Fortunately, there was a solution: another tag on Sep 20 — this time at 43.06.  By coming back for another swipe at it, the rising channel bottom was tagged, too.  With that nicety out of the way, the next rebound was even more impressive: 13.8% as of earlier today, when it tagged our 48.64 upside target from last week [see: Don’t Worry, Be Happy.]

For those who’ve played along in CL, congratulations.  You’re up about 35% (unleveraged) in the past five weeks alone.  This, on top of the 120%+ that came since our Feb 11 bottom call [see: USDJPY Finally Relents.]

For those who haven’t, I encourage you to give it some thought.  Charting CL has been easier than charting equities — especially since I came to understand that CL was being used as a tool with which to drive equity algos.

With that said, let’s look at the path forward.  Today’s high marked an incredibly important inflection point.  Where it goes from here will likely be the most important determinant of equity prices for the remainder of the year.

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A reminder: today is the last day ever to sign up for a Charter Annual membership.  It’s priced at 57% off the usual annual price and protects you against future price increases for the life of the site.  At the equivalent of $70.83/month, it’s a deal.  And, for commitment-phobics out there, we’re offering a $150 rebate on the first month of monthly recurring subscriptions.  For more details and to sign up now, CLICK HERE.

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October: it’s the month of some of the nastiest markets in history.  Recently, however, it’s been the month of some of the most impressive interventions (remember Kuroda’s Halloween surprise in 2014?)  Which will this October be?

On the one hand, we have another potential global financial meltdown brewing.  Deutsche Bank’s 18% rally off last week’s must-hold bottom [see: Deutsche Bank: Will it Survive?] is in danger of faltering, as the rumor of a deal with the DoJ is turning out to be nothing more than a rumor.  Who would do such a thing!?

On the other hand, several of the most powerful algo drivers have been coiling for the past month, signaling a potential break out.

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September came in better than August, totaling +14.44% compared to the S&P 500’s  0.04% loss.  This brings our monthly average for 2015 and 2016 to 16.45% versus SPX’s 0.31%.

The month started off as a continuation of August’s extremely low volatility.  In fact, through September 7, volatility in the Dow (trailing 40 sessions) was the lowest it had been for over 100 years.

With the S&P 500 having finally topped its 2015 highs and the critical 2138 Fib level, it was on a mission to hold its gains. There was very little in the way of positive economic or geopolitical news to justify it.  As if that really mattered…

Central banks went back to the well with well-timed ramps in oil (26%, 11% and 12% starting on Aug 19, Sep 1 and Sep 20 respectively) and USDJPY (+4.8% between Aug 16 – Sep 2) to goose the algos whenever necessary.

And, the Fed rediscovered its fondness for VIX, repeatedly monkey-hammering the (former) risk indicator whenever stocks needed a little help.  The drop from the post-Brexit 26.72 to 11.02 in early August was one of the steepest declines ever.  Having been so successful in staving off Armageddon, VIX was utilized frequently to prop up SPX.

This sometimes left us twisting in the wind during August and September.  I’d see SPX break down through support towards a perfectly logical downside target and recommend a short position, only to see VIX suddenly plunge by 20-30 cents — sending SPX higher or, at least delaying its decline.  Trade advices were affected a whopping 27 times last month.

It happened most often at the end of the day — the purpose being to make bears think twice about staying short overnight.  After being suckered into it a couple of  times, I recognized the pattern and opened up to more frequent overnight positions — staying long or short 6 times overnight for an average gain of 10 points (about 1/2%.)

As regular readers know, I almost always include the proviso to hold long or short overnight only when you’re able to hedge or watch your position, or are an experienced swing trader.  In my opinion, swing trading has become nearly impossible, with over half the sessions featuring a gap up or down.  In September, it happened 17 times in 22 sessions.

In the end, our forecasting went well.  The dip to 2138 I forecast on Aug 19 was supposed to happen on Sep 12, but occurred a day early.  And, the rally I forecast based on the expectation that the BoJ and the FOMC would hold rates steady went off without a hitch.  From the day before:

The BoJ and FOMC [should] both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.

If all you had done was play the Sep 9 breakdown and the BoJ/FOMC decisions, you’d still have made 8-9% in an unleveraged trading account [more for those who use margin,  options or futures.]  It’s a good reminder that you needn’t follow every trade advice in order to do alright. Some of you would be perfectly happy placing a few trades per month rather than per day.  If this describes you, I encourage you to study the Big Picture posts and the 60-min and daily charts [our last was What to Expect on Sep 20.]  I posted a compilation of them in August, available HERE, and I have to say they’ve performed extremely well.

The fact is I prefer swing trading.  But, given the gap and VIX issues pointed out above, it continues to be incredibly difficult.  The number of formerly successful hedge funds which have closed up shop these past few months is truly staggering.

Regardless of your orientation, I’ll continue to pare down the number of trade advices issued each day.  Lately we’re running about half of what I put out a few months months ago, and I’ll continue trying to reduce the total.  Most of you seem to be happy with the change.

The next few months are certain to be interesting.  Deutsche Bank, with its $47 trillion in derivatives, is on the ropes.  Oil, misunderstood by nearly everybody, continues to enjoy spurious 10%+ rallies.  Currencies bend to the will of central planners rather than market forces.  There’s an important election in the US in about five weeks.  And, there are more central banker decisions to come.

However it unfolds, I’ll do my best to make sure that you see it coming.

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We’re trying something a little different with memberships this month.  I’ve never been a big fan of trial memberships.  Too many folks sign up in order to get the info they need that day, then turn around and cancel a few days later.  But, I recognize the value of knowing what you’re getting into.

The next 25 new members will get the first month of a Renewing Monthly Subscription for an effective $100 (normally $250.)  If it’s not for you, simply cancel.  If you like what you see, you can continue at the regular monthly rate or upgrade to a Charter Annual membership at the currently discounted price of $850 within the first 30 days.

We’re phasing out Charter Annual memberships, in which the subscription price is guaranteed never to increase, on Oct 3 (existing Charter Members can continue to renew at their old prices.)  So, this is a great way to get an inexpensive peek and still enjoy big savings longer-term.

For details and to sign up now, CLICK HERE.