Oil just tagged our next downside target at 44.10.  It’s been almost four weeks since we called the top on CL [see: Welcome to Peak Oil.]  CL has since fallen over 14%.  And, while it’s been a great short, its influence on SPX has been almost as impressive: a 4% drop (the thin purple line below.)Unfortunately for equities, oil’s drop isn’t finished — not by a long shot.

continued for members…

For starters, there’s a SMA200 down below at 43.31.  And, that doesn’t even begin to resolve the inflation problem.  As we detailed in Watching and Waiting, the follow up to Peak Oil, CL must get back down below 30 in order not to have a big impact on headline inflation figures.  Using a back of the envelope calculation, if a 14% drop in CL produces a 4% drop in SPX, then another 32% drop in CL could produce a 190-pt drop in SPX.

But, is that likely?  It depends.  SPX and ES are both likely to tag their own SMA200s this morning.  If the slide that began on Aug 15 is to be arrested, this is the obvious support.  From yesterday’s close:

Everybody and their mother will be looking for a bounce here.  As we discussed yesterday, it’s also the 1.618 extension of the small, purple harmonic pattern.  But, to assume it’s the bottom, one would have to ignore the other, more prominent harmonic patterns, not to mention a large channel dating back to 2009. Its bottom is currently at 1965, which is only slightly higher than the purple .618 at 1956.68.

Note, however, that the yellow channel charter above is only half of the channel from 2009 that actually connects the 666 lows.  Its bottom is currently closer to 1675, though they could limit it to another (5th) tag of 1823 by dragging it out until October 2017.

BTW, ES is coming up on its SMA200 at 2077.72 and SPX’s is 2082.29.  Both should need to tag theirs in order for the interim bottom to take.  Of course, with everyone planning on buying the dip, it’ll probably take an act of congress (more likely, CL dropping below its SMA200) to effect the tags.

What could drive SPX that much lower?  The biggest risk, IMO, is a departure from easy money policy.  The second biggest risk is a disappearance of carry trade vehicles.

According to Trump, the Fed has created a “false economy” and an “artificial stock market.”  He has said Janet Yellen “should be ashamed of herself.”  Suffice it to say, there would likely be a shake up in the Fed’s policies if Trump were elected.

Another possibility, though even more remote, is that the Fed starts taking inflation seriously and begins normalizing interest rates.  What goes up due to easy money, must come down — or, so the theory goes.

As far as carry trades go…if CL drops out of the running, the most obvious candidate to take over again is the USDJPY.  Recall that it broke out of the falling channel it’s been in since Oct 2015 back on Oct 4.  But, lately, the yen’s been strengthening on the apparent lack of interest by the BoJ in expanding its QQE.  It looks more likely to backtest the red channel, or at least the white Flag Pattern bottom at 100.7 than it does push up to new highs.

However, NKD is going to be testing support again, soon.  After recently reversing at the .886 at 17499 as expected, it has a 5-6% buffer before the rising white channel bottom is in danger.

Here’s the bigger picture:

Bottom line, there’s room to the downside — as evidenced by DX’s chart.But, it won’t be long before the BoJ starts getting nervous enough to rev up the printing presses again.

UPDATE:  12:33 PM

SPX just tagged its SMA5 200.  If it’s going to tag the SMA200, this is the place for it to turn. If you’re not still holding short from earlier this week, 2098.48 is your entry point — with tight stops.

For those keeping an eye on DB, there’s a clear path to 12.85 – 13.05 today.

UPDATE:  2:55 PM

Finally breaking down?  We still have a shot at 2082.29 by 3:34PM…UPDATE:  3:31 PM

Almost there.  As always, hold short over the weekend only if you can hedge or handle the gap risk.  Otherwise, we’ll see how low we can ride it before the bell.