Back on May 18 [see: Bonds and Value] I suggested the 10Y might be a good value at 118’105 (yield of 3.11%.) The 2s10s had just reached a trend line connecting previous lows.

Ten-year yields had recently reached the top of a channel connecting previous highs.

DXY had just reached the top of a falling channel.

And, 10Y price had just reached the bottom of a rising channel.

It was an important test, as we discussed at the time.

The 10-year is at an important inflection point, poised between a strong rebound and a significant selloff.  Its next moves are critical not only from an investment standpoint, but in terms of what to expect from the broader economy.

Now that yields have broken out and prices and spreads have broken down, we’re already beginning to see the effects on the market and the broader economy.  Bottom line, they aren’t good.

The Fed is bent on (1) creating more headroom for easing the next time it’s needed, and (2) dealing with an inflation problem that the official data don’t reveal but which is very real and getting worse.  They are also wary of allowing a 2s10s inversion because it would portend a recession.  Last, they are trying to prop up the USD because it helps stave off inflation that would pressure rates higher.

They can’t very well come out and say inflation is really pushing 6 or 10% without panicking the bond markets.  So, they’re talking yields up slowly and, more importantly, not pressuring them lower as has been the case for the past decade.

The repercussions, though, are already being felt domestically in the overinflated housing market, in the auto market, basically anything which relies on low interest rates for sales.  But, the most serious repercussions are in emerging markets, where huge amounts of dollar-based debt must be repaid with appreciating dollars.  The defaults could be catastrophic.

The critical question is how high rates might eventually go.  Here, the view is hopeful.  Members might recall we had two potential channels for ZN, the price of 10Y notes.  I never liked the white channel that much because the midline was all wrong.  The yellow channel worked perfectly except for the slight overshoot in 2012 – which was a year of heavy, heavy manipulation.

So, I’ve always been inclined to believe more in the yellow channel — which says that 10Y yields have now topped and ZN has bottomed.

continued for members…

Futures are off 10 points, still clinging to the Jan highs…but perhaps targeting our downside target from yesterday on a backtest.VIX remains broken out, but has yet to go to the next level — smacking of a delaying tactic.RB and CL have risen less than I expected from Hurricane Michael, but have yet to break down. And, USDJPY is also treading water.

UPDATE:  10:04 AM

ES just reached our next downside target.

This is the bottom ES’ channel from April – solid support unless we get an overshoot or the channel breaks down.

As we discussed on Monday, this leaves SPX somewhat in limbo, without a solid chart pattern to bounce off.  So, this bounce has to be regarded as suspect and potentially will fail in favor of SPX reaching a channel line or SMA.

Note that VIX actually reached the .886 that it merely came close to the other day but is still somewhat constrained given the degree to which stocks have fallen.

Note also that RB has broken down slightly.  Could today finally be the day for that SMA200 backtest?The other reason I think we’re not quite done yet…

UPDATE:  11:25 AM

SPX has reached its channel line target as ES approaches its 1.786/.886 and RB and COMP their SMA200s.  There’s a good possibility of a bounce here, though I’d feel more confident if those SMA200s were actually tagged.  Odds are that would mean a tag of the SMA100.  It would be logical, then, to look for the SMA200 tag in conjunction with VIX’s breakout to 24.20.

But, the tricky aspect of it is ES’s white channel.  If it remains broken, that’s a major development.  Other support: the SMA100 at 2825, the SMA200 at 2767 and the yellow channel midline currently cutting through that major 2.24 at 2728.79 – another 120 points lower as soon as tomorrow.COMP faces a similarly important test at its SMA200.Just a reminder, this is not SPX’s channel bottom but its .236 line.  Its white channel is quite different from ES’.  The really solid support is way down at the yellow channel midline.  I’ve moved the SMA200 target currently around 2780 to Nov 8ish to reflect the intersection there.

UPDATE: 2:44PM

ES is dropping through its SMA100 and VIX above its .618, so I think SPX 2800 is in play.

A bounce here would potentially set up a larger H&S Pattern with the purple neckline from August.  Note that RB has a little further to go.

And, VIX is a good candidate for the .786 or .886.I don’t think this will be over until COMP tags its SMA200, currently 7499.15.  But, I thought the same thing on Feb 9 and Apr 2, and was dead wrong both times.

UPDATE:  3:15 PM

Pretty darned close.  We often get one last push bottoming at 3:34 or at the close.  Since RB is still slightly above its SMA200 and VIX could push up to 22.62 or 24.20, this remains a decent possibility.

 

UPDATE:  3:42 PM

SPX’s white channel bottom.  For those who don’t want to take overnight risk, this is a decent exit point.  But, I expect it’ll go lower.

ES has reached its neckline, even though SPX still hasn’t.  And, the SMA200 is hanging out there like an arcade prize.

Headfakes are always a possibility, but COMP is currently below its SMA200.  If it’s going to bounce, this is generally when it’d happen.  If it doesn’t, it’s a good argument for SPX 2742 or 2742.92, 2765 or 2702.78.VIX certainly suggests more equity downside, potentially follow through tomorrow.Ditto for USDJPY.

Even CL is picking up momentum.Bottom line, I think there’s a very good chance of a SMA200 tag (2765.51), a 50/50 chance of tagging 2742.92 and and a 25/75 chance of backtesting 2702.78.  I expect the Fed to say something accommodative in the next 24 hours — probably Jim Bullard.

I’ll try to post later.

UPDATE:  4:35 PM

Tough after-hours…RB just let loose, and ES is getting very close to its SMA200.  UPDATE: 11:55 PM

SPX’s close….

…and, COMP’s.

Eight hours post-close, ES was down as many as 30 points.

API reported the biggest crude build since July 2017: +9.75MM barrels. Needless to say, this is helping CL along towards our downside goal.

RB is through its SMA200 and still going.

VIX is almost to our 24.2 target.  I presume going the rest of the way will help SPX reach its SMA200 in the morning.  I won’t be surprised if a Fed president, probably Bullard, says something very accommodative in the morning that halts SPX’s decline somewhere around 2702 much like happened back on Oct 15, 2014 to save the 1.272 Fib (1823.42.)  More in the morning…

Finally time for the dollar to capitulate?