With an economy bumping along, stagnant in most respects, and inflation on the rise, it’s getting harder and harder to avoid the stagflation diagnosis.  Let’s see what Ms. Yellen comes up with later this morning.

For those who missed it, PPI was up a blistering 0.6% last month — largely on the sharp rise in energy prices.  Ironically, it is oil futures which are spiking higher this morning in order to mitigate the data’s effect on equities.

It didn’t start out that way.  Moments before the PPI number was released, VIX did a 0.25 plunge — a shot across to bow, as it were, to remind everyone that it can and does drop to whatever extent necessary to keep stocks from falling.

continued for members…

The bigger picture shows that VIX tagged the midline of the falling red channel.

While CL recovered from a momentary breakdown of the rising white channel.

ES’ rising white channel has broken down, but VIX and CL have kept the losses to a minimum — only 2.25 points with 10 minutes to go before the open.SPX will open lower, with a backtest of at least the 1.618 at 2321.88 to be expected.  Beyond that, we have the SMA5 200 at 2318.61, the 1.272 at 2310.18 and the former high and round number at 2300.99.

But, of course, it will depend on how aggressively stocks are propped up while Ms. Yellen is testifying to Congress.   Watch VIX, which should pop above the SMA10 at 11.27 on the open.  If they swiftly bring it back down, then the fix is in.

This is probably as good a time as any to review the big picture.  I’ve labeled the major channels below by placing a number on each’s midline.  SPX broke out of the rising white channel (2), also marked with yellow arrows.  It was never backtested.

SPX’s rising white channel (3) from last Feb broke down, and it has been constructing a parallel rising yellow channel (5) whose midline has held up pretty well since December.

SPX has run into resistance at the rising yellow channel (1) midline, the rising purple channel (6) top and the rising red channel (4) midline.  Clear everything else away, and these channels might present difficulties for the rally.

But, as we’ve discussed ad nauseum, it all boils down to the algo drivers and the Fed.  Oil, which enabled the rebound from Feb 2016, has become problematic from an inflation standpoint.  USDJPY and the DX are, by most measures, too high from a trade deficit standpoint.  If the FOMC responds, as they should, to higher inflation by raising rates, stocks might throw a tantrum.

The question will likely come down to how much inflation the FOMC and other central banks are willing to allow.  In past rate rise cycles, debt levels weren’t so alarmingly high.  This time, we’re in uncharted territory.   No. One. Knows.  And, it’s more than a little scary.

UPDATE:  9:45 AM

SPX got a bounce at the SMA5 100 to backtest the broken purple channel when VIX broke down below its SMA10, but has dropped back down.  I suspect the goal is to prop it up until the SMA5 200 gets to or near the 1.618 at 2321.88.

CL is backing off its earlier spike……which, of course, means that USDJPY needed to break out of its falling purple channel.  If it’s not one thing, it’s another.

Eyeballing it, it looks like 2321.88 for SPX would match up with ES backtesting the rising white channel and rising yellow channel it broke out of.

Here’s a better view on the 60-min chart.

But, it’s the daily chart that shows what a big deal a breakout would be.

UPDATE:  10:18 AM

The USDJPY is really going, now.

VIX is dropping through its SMA10 a second time — just in case folks missed the first one.The likely target, unless Yellen says something that sends traders into a tantrum.

UPDATE:  11:11 AM

SPX just came within .29 of the 1.618 at 2321.88.  I’d go ahead and cover the short here just to be on the safe side.  There should be other opportunities to short if it drops through the Fib or the SMA5 200.

It was a quick tag, so if you missed it there’s a pretty good chance that it’ll be back when the SMA5 200 reaches 2321.88.  It’s currently at 2320.49 and should intersect around 12:45 ET.

Is there more downside potential?  Sure.  But, unless Yellen suddenly breaks into a sweat and mutters “we’re all doomed,” odds are the plunge decline protection team will do what they usually do when she testifies: perpetuate the belief that the FOMC has things well in hand and the market should go higher.

UPDATE:  11:35 AM

If it’s going to return and tag 2321.88, this is the time/place.  I’d short here at 2327.50 with tight stops.  Watch closely as the SMA5 10 arrives.

Four VIX-hammering exercises…and, counting.

UPDATE:  11:58 AM

SPX was on its way to 2321.88, with the SMA5 200 only .70 away, when VIX started dropping — just enough to stall SPX’s decline.  CL quickly plunged, which pinned SPX below the red TL.  But, whoever’s working VIX today thought it would be better to break out above the red TL.  The contest was decided in favor of an SPX bump up to the yellow midline.

CL is almost back to flat on the day.  I’d hold the short position, but would cover if it pops up through the yellow channel line at about 2328.58.  If CL really wants to end the rally, it’ll have to drop through 52.77.

UPDATE:  12:33 PM

This is about as far as things can go without the chances of a 2321.88 tag being eliminated. I’d cover here and wait to see if there’s any follow through before taking another position.  VIX does have potential support at the purple TL at 11.02, which might correlate with the 2.24 for SPX — a potential turning point.  A drop below 11, on the other hand, probably means new highs.

UPDATE:  12:37 PM

Last chance for the bears…worth a stab at shorting with very tight stops.  But, I’d put the odds at no more than 50:50.  It would require a reversal off the SMA5 200 and white channel bottom for CL, a drop of any kind for USDJPY, and a bounce off the purple TL for VIX — a tall order on a Fed testimony day.

ES, in fact, seems to suggest a breakout rather than breakdown.

UPDATE:  12:50 PM

Bailing here at 2330.32.  VIX just plunged below 11 and CL is being propped up at the SMA10.  Should get new highs out of this, even if it isn’t much in the way of points.  

Add this to another in a long and growing list of falling channels that was broken out of and, of course, yet another V-shaped recovery in the face of news that should see stocks selling off.

FWIW, ES will backtest its purple channel around 2330, while SPX’s is about 2333.  I don’t see any problem playing along, as long as you use relatively tight trailing stops and are prepared to exit after only a few points.  Otherwise, I’d stay on the sidelines and wait for it to play out.

Also, FWIW, I wouldn’t short at the backtest, regardless of the signals.  I’d wait for a break of the dotted purple TL at least.  We’ve seen too many instances of channels being rejoined after such breakdowns.

UPDATE:  1:12 PM

Speaking of changing narratives…

The commentary will be about how the market wasn’t bothered by the thought of higher interest rates as early as March.  It reversed a modest decline and closed higher on the day.  The facts, of course, are that four separate monkey hammerings of VIX, a timely rebound by CL, a sharp spike in USDJPY and some expert stop-running all supported the “market’s” V-shaped recovery.

At the end of the day, no one cares how SPX popped through overhead resistance — only that it did.  Note that ES rebounded precisely at a backtest of the broken white channel.  Either the yellow channel top is off a little (not uncommon in channels that are as old as this one) or TPTB decided that it was too big a risk.

UPDATE:  2:09 PM

For those playing along to the upside, this might be a good place to duck out.  ES has reached its red 1.618, the next highest level of resistance.  And, there’s a Fib resistance level at 2336, not shown on the chart, for SPX.  If it pops through, by all means play along with tight stops.  

Likewise, if it reverses here and drops through the purple TL at 2336 or the SMA5 10 (if you want to avoid being whipsawed) I’d be happy to go short.  The initial objective would be 2328-2330, followed by 2322.

I have to duck out for an hour, but will be back before the close.

Note that VIX is on the rise, back above the purple TL. CL has broken the red TL and is likely to drop through the the white channel bottom after the close.

One thing bulls have going for them: DB, which is an indicator of sorts for me, is back above some of the resistance it was facing.  If it can pop through the SMA10 at 19.58 (it usually has no shame, when it comes to manipulation), it would be a very bullish sign.

UPDATE:  3:39 PM

Looks like TPTB aren’t going to allow this TL break to play out.  VIX dropped to and through the red TL and is likely to go for the purple line by the closing bell.

I’d cover the short here unless you’re able and willing to roll the dice on a drop overnight.  I’d like to think that investors will consider the inflation implications and cut back on their exposure.  

But, so far, the algos have had their way with ES and SPX — outweighing any negative knock-on effect.  The implication is another gap higher overnight, even if the fundamentals argue against it.

 

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