As the “markets” position themselves for the Fed’s rate hike on the 16th, one can only speculate as to which levers will be pulled in order to convince investors that higher interest rates are a good thing.

Oil, for instance, has undergone a massive slide since early October, and now sits at the lowest point possible for a potential rebound that wouldn’t break all the rules. As we’ve noted many times, it’s the overnight drop that sets up the bounce that helps stocks rise during the trading session.  The key is knowing when and where the bounce will occur.

continued for members…ES is currently off about 4 points.  So, we’d normally presume a drop into the opening minutes.  In this case, I’ll take a wait and see attitude — thanks to oil.  If it rebounds right off the bat, then SPX’s initial slide could be limited to the SMA10 at 2082.63.

If the rebound falters, then the SMA 20 at 2075.85 is a better target.  Note that Friday’s rally stopped at the white channel midline, which would ordinarily suggest a drop to the white channel bottom.  But, these aren’t exactly ordinary times.

UPDATE:  9:37 AM

SPX is testing the SMA10 as CL and USDJPY continue to exhibit weakness.  I’d be short on any sustained push through it. UPDATE:  9:41 AM

USDJPY is arguing for lower prices, so I’d be short here.  There’s no reason for USDJPY to keep inching lower other than to try to influence SPX down the next lower level of support.  Note that USDJPY has flouted channel rules and rejoined the rising red channel from last week.  Whether it will last is anyone’s guess, but it’s enough to have given SPX a shot in the arm on Friday.  I’m assuming that, having broken the purple fan line, USDJPY is aiming for the red one.At this point, it looks like SPX is heading for the daily SMA20 where it intersects with the 5-min SMA100/200 at 2075ish.  But, we’ll keep an eye on CL.  If it makes new lows, then all bets are off on a rebound.  Below the SMA20, of course, is the more important SMA200 at 2064.80.A rare intra-day drop by USDJPY.  It’s  job is usually to prop up stocks, not bring them down.UPDATE:  10:07 AM

Almost there.  CL even poked down through a little TL from recent lows – suggesting there’s even more downside.  At this point, it seems designed to get SPX down to the obvious support.  But, if it doesn’t rebound, there’s a lot more downside. Note the presence of another TL of support (purple below) that helps form a megaphone.  It’s currently around 38.10, but is obviously dropping. UPDATE:  10:29 AM

CL just tagged the purple TL, and USDJPY is slipping below its 5-min SMA200 — just enough to get SPX to the SMA20.  We’ll look for a potential bounce here. If it doesn’t, then the SMA200 at 2064.80 is our new target.

UPDATE:  10:33 AM

SPX is dropping through the 5-min SMA200 on USDJPY’s drop, while CL suddenly popped back above the purple TL.  USDJPY continues to inch lower. Note that SPX’s daily SMA200 is still 5 points or so above ES’s.  So, as happened last week, SPX can tag its SMA200 when ES is still 5 points above its.  It can lead to an overshoot to the downside because ES is at least as important as SPX – probably more so.

If it declines until ES reaches its SMA200, that would indicate about 2060 in SPX — just below the white .618 in the chart below.We’ll also keep an eye on DX, which has poked down through its channel midline and could help move things along to the downside if it so chooses to test, say, the channel bottom.Note, also, that CL has pushed back above the purple TL and is positioned to break higher when the time comes.UPDATE:  11:40 AM

First potential departure from the downward trend here…  I’d dump the short position on any lasting push up through the 5-min SMA20.UPDATE:  11:51 AM

Ditching the short position on the move through the SMA200.  Will gladly revert back to short if/when it drops back through.  Odds are it’ll reverse at the SMA20.

UPDATE:  12:00 PM

Back to short here at the SMA20.  USDJPY just backtested the red channel bottom. UPDATE:  1:05 PM

CL just dipped below its Aug lows in order to drive SPX lower.  Gutsy move.  USDJPY still hanging around support. UPDATE:  1:11 PM

Because they can.UPDATE:  1:26 PM

USDJPY still edging higher, and CL is backtesting the Aug low — a little too aggressively for my taste.  SPX could pop up and tag the SMA50 at 2074ish here. Whether it reverses there – I think so.  Lots of daily lows take place this time of day: 1:30-1:45.

UPDATE:  2:03 PM

Probably just a head fake, but I’d close the short position here on any move through the SMA50 and reopen it on a move back down.UPDATE:  2:33 PM

This is about as exciting as plucking navel lint…  Taking one more shot at shorting down to the SMA200… …only because USDJPY looks interested in making it happen……and, CL supports it as well.Tight stops are suggested, as there’s a pretty good chance they’re just trying to delay the tag until tomorrow morning.  If this is the case then a close back at or even above the SMA20 can be expected.

UPDATE:  2:55 PM

Here’s the scenario I have in mind…though it’s just as possible for a gap down first thing in the a.m.If it plays out as a flag pattern, it targets 2048.79.

UPDATE:  3:16 PM

Getting harder and harder to ignore USDJPY popping up through the white channel.  I’ll go ahead and close the short position here. Seems like the BoJ isn’t the only CB with a 1% rule.