The first big Republican victory — the repeal and replace of the ACA — has morphed into reproach and retreat. The net impact: what does this failure portend for the rest of the Trump agenda and, thus, the Trump Rally?
Regular readers know that I’ve looked askance at this rally from the start [see: Why the “Trump Rally” is a Fraud.] It was born of a sharp reversal in CL, USDJPY and VIX — the key algo drivers. Momentum traders jumped on board as it rose. And, somewhere along the way, mainstream investors convinced themselves that the new and improved outlook justified an 18% rally.
But, live by the algo, die by the algo. The yen had to appreciate to compensate for higher oil prices. Higher US and euroland inflation necessitated a drop in oil and gas. And, front-running the Fed’s tepid response to spiking inflation was widespread. With the Trump Rally narrative in doubt, there were simply too many plates to keep spinning.
Futures are off 22.50 at the moment, leaving us some clues as to what to expect for SPX. But, the more important side of the equation is where do WTI and the USDJPY dip to?
continued for members…
ES was off 27 earlier, tagging the top of the rising purple channel at 2317.75. This translates into 2317 for SPX — which is close to the next lower gap (2319.23) we experienced on the way up.
CL is well on its way to our 45.36 target and is poised to break down below key horizontal support this morning. But, of course, that’s what I thought last week.
USDJPY has the potential to reach its SMA200. But, as we’ve discussed the past few days, I wonder whether it’ll be allowed to dip that low if CL is also plunging.
UPDATE: 9:55 AM
If we’re going to get any lower, this would be the logical place for the bounce to falter. USDJPY and CL at resistance, and SPX at the SMA50. We’ll know soon enough, as the SMA5 10 has almost caught down to SPX.
If USDJPY pushes through its SMA200 and CL above its white channel midline when the SMA5 10 arrives, we’ll look for SPX to close this morning’s gap at 2335.74 for starters, and if the algos have their way — a full recovery.
CL’s decline has been poorly handled so far. I suspect it will wait to continue its downside until after hours. It could trend sideways for the rest of the day if VIX and USDJPY can shoulder the propping responsibilities.
On the 60-min chart, ES appears to have come close enough to the purple channel top. But, precise placement is always tricky with a long-term channel like this.
UPDATE: 10:20 AM
ES is in a good position to be able to break out.
Here’s the purple channel that can be seen in the ES chart above. I believe they’ll try to preserve the breakout that occurred back on Feb 10. The interesting thing about this chart is how ambitious the breakout was. Had they waited until May, the purple channel top would have reached the white 1.618 — making for much more difficult overhead resistance.
I’n watching for SPX to break higher once the SMA5 20 arrives. I’d go long here if it breaks through the SMA50 (2330.56.) If it reverses, we should get down to 2319.23. But, I think it’s probably more important to preserve ES’s breakout than to close that gap — if they can manage it. Note that a return to 2343-2344 gets SPX back to even on the day and leaves its yellow channel breakout intact — a huge coup for the bulls.
One key to making that happen: knock VIX back below the gray channel bottom at 14.14 and, ideally, the rising purple midline at 13.54 — which is, coincidentally, also the SMA200.
So, we’ll look for VIX to prop up prices while we wait to see whether CL continues its slide now — or, waits until after hours.
One other note: DX has reached our target range, tagging the .618, yellow neckline and purple TL we discussed last week. It stands to get a nice bounce here if it can hold 98.901. This would go a long way toward propping up stocks if CL decides to break down below 47, which I expect it to do.
UPDATE: 11:11 AM
SPX did well in pushing past the SMA50 on a ramp from CL and a drop by VIX — which probably has further to go. We might get a backtest here, but I’d stay long as long as it remains north of the SMA50. USDJPY hasn’t really joined the party yet. CL has bounced out of its latest falling channel and is testing its SMA5 200. Given its last two bounces at 47, I’d give up on our short if it pops through.
I have to take a 30-min break for a conference call, will be back asap.
UPDATE: 12:09 PM
SPX has backtested the white channel bottom as well as reached the falling purple channel .786 line. We could get some weakness here, as CL is taking the opportunity to back off its earlier ramp. But, VIX is continuing its sell off, and seems capable of keeping the rally alive. And, the SMA5 10 and 20 are still just below for support when needed.
I would expect any sell off to be limited to the gap close (Friday’s low) at 2335.74. The yellow channel bottom is just above at 2343.88ish and the SMA5 200 is above that at 2347.76. For now, it is my leading candidate for today’s close.
UPDATE: 1:07 PM
Fed president Evans is due to speak in 10 minutes. Not sure if he’ll have anything important to say, but it’s worth noting that SPX is back to the yellow channel bottom and only a few points below the SMA5 200. A pull back somewhere in here to tag the SM5 10 and/or white channel bottom would make sense. Otherwise, I’m still looking for a few more points to the purple channel top and/or SMA5 200. ES is nearing TL resistance. And, USDJPY is nearing a falling channel top.
Obviously, Evans could be a non-event. But, if he’s relevant, he could reinforce the notion of a reversal at resistance — OR, he could help generate a breakout. I would imagine that, after this morning’s fireworks, he’ll be cautious not to say anything that would cause more of the same.
UPDATE: 1:37 PM
Getting word re Evans’ speech. I’d dump the long position and revert to cash here. Details in a moment.
Here are the headlines that just came over…
Notice that he’s speaking out of both sides of his mouth: up to four rate hikes, but disappointing growth and high uncertainties. It remains to be seen how investors take this. Is bad news good news re monetary policy or is it just plain bad news? I’d revert to long if SPX, which has now dropped through the white channel bottom and the SMA5 10 and 20, can pop back above the white channel bottom — now at 2340.50.
1:49 PM now, and here’s what has happened over the past 10 minutes… Evans is live on Bloomberg Radio.
UPDATE: 1:59 PM
SPX still in a time out, waiting for the SMA10/20 to arrive and give it something to break out above. Again, I’d go long on any move through the white channel bottom. I expect SPX to close at or above the yellow channel bottom, now at 2344.20, and quite possibly at the SMA5 200 now as 1246.89. VIX has a clear shot down to 12.48 or so. I have to step out for a while, should be back by 3pm.
UPDATE: 2:21 PM
Good place for a bounce if it’s going to make it up to the yellow channel or higher by the close. Back to long here with very tight stops. I’ll be back in an hour or so.
UPDATE: 3:43 PM
Everything pretty much on track, with SPX just reaching the yellow channel bottom and nudging up against the SMA5 200. I expect it to continue higher tomorrow, but only hold long if you can hedge or deal with the risk of a breakdown overnight. Otherwise, this is your exit point. I have to duck out a little early today, so GLTA.
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