Note: First quarter 2017 results have been posted. For the latest, including news about a membership promotion starting today, CLICK HERE.
Sometimes you’re the windshield,
Sometimes you’re the bug.
Sometimes it all comes together baby,
Sometimes you’re a fool in love.
Sometimes you’re the Louisville Slugger,
Sometimes you’re the ball.
Sometimes it all comes together baby,
Sometimes you’re going lose it all.
It seems another hedge fund bites the dust almost every day. It’s hardly surprising, given the state of the “markets” lately.
It used to be that having a strong grasp of macro- and microeconomics and financial statements was enough to generate respectable investment returns.
Now, it seems that funds have essentially three choices:
1) become a closet indexer — hopefully, with alpha thrown in from brilliant stock picking
2) be extremely nimble — avoid or take advantage of seemingly random rips/plunges
3) be one of the manipulators (or shadow them)
Being a closet indexer doesn’t work very well in a 2/20 structure. While there are certainly some great stock pickers out there, even great picks suffer along with everything else when the market is plunging.
And, it’s challenging to be nimble if you’ve got anywhere north of $1 billion — or, even $100 million. Given how low volume has become, stocks are sensitive to big moves into and out of markets.
This leaves our manipulators — central banks, their lackeys and big, data-driven firms which are able to shadow or emulate them: Renaissance, Citadel, etc. (some have even accused these firms of being able to help write the daily script via their ability to drive the algo drivers.) If you’ve got $20+ billion and like to throw your weight around, you can make your own luck.
Bottom line, stocks are driven all day, every day, by algos which feed off three primary drivers: the price of oil, USDJPY and VIX. Each of these is manipulated on a daily basis, primarily by central banks but almost certainly by other large players. If you haven’t noticed this, you haven’t been looking very hard. Together, they were entirely responsible for the election night recovery and subsequent Trump Rally [see: Why the Trump Rally Is a Fraud.]
Yesterday, I forecast a pop and drop, calling for a short at 2351.52 (within a point of the top) which we then rode down to 2336.75 (within 2 points of the bottom.)
VIX, which was hammered over 12% off yesterday’s highs, is curiously on the rise. Could it be that this ramp job isn’t meant to stick? It’s been a while since we had a nice pop and drop… Note that the IH&S has completed, so this is a make or break moment for SPX. I’d short here at 2351.52 with tight stops.
We picked up 0.6% for the day only by watching and anticipating the price action and interplay between CL, VIX and USDJPY. It wasn’t an amazing day. But, string enough 0.6% days together and you get a nice month. Those who ignore chart patterns and technical analysis were left scratching their heads.
It works around 90% of the time. When it doesn’t, it’s because: (1) something big is happening that can’t be contained by a timely hammering of VIX or a USDJPY ramp; (2) those doing the manipulating have their signals crossed; and, (3) the move is imminent, but is delayed multiple times while the big boys position themselves ahead of time.
Last month, this approach generated 13.15% — a little below our average of 14.58% since Jan 2015, but better than the two previous months (meltups are challenging.) [see results.] While I generate medium-term and swing targets, about half of our returns are the result of intra-day swings — many of which are head fakes.
The worst are those at the end of the day. Yesterday’s close, for instance, saw a three-day old channel break down. In the old days (pre-2010) this would have been a bearish development, particularly since stocks are likely headed lower over the next week.
From yesterday, just before the close:
But, a timely push above resistance by USDJPY and a timely after-hours dip by VIX ensured that SPX opened back inside the rising white channel. They can just as easily push SPX up and out of its falling purple channel. So, as is often the case, forecasting this beast involves discerning the intent of those who are doing the manipulating and contrasting it with inherent limitations they face.
A simple example is the USDJPY. By hammering the yen (an increase in the USDJPY) it’s easy to drive stocks higher. But, at some point, a cheaper yen hurts Japanese consumers and businesses who must pay higher prices for imported oil and food.
If you’re thinking “hey, wait a minute; this is the tail wagging the dog!” you’re absolutely correct. In fact, I’ve had even better results in forecasting currencies and commodities, as they usually wear their motivations on their sleeves.
If you’re thinking “hey, wait a minute; this is easy!” you’re dead wrong. I watch 10-12 charts on six monitors all day, and the interplay between them often defies logic. For example, we’ve had several instances, lately, of VIX and stock prices both rising or falling at the same time.
It’s also quite common for large moves to be delayed all day long, only to take place after hours. And, don’t get me started on intraday ramps in USDJPY that are unwound after the close each evening, when futures are more easily propped up (watch it tonight.) Even worse: ramping VIX overnight so it can be hammered during market hours when stocks need a boost.
All this to say…if trading has been tough lately, you’re in good company. If a $3 billion hedge fund with dozens of insanely smart analysts and traders backed up by world class research and computers can’t hack it, maybe it’s not them. Maybe it’s the market that’s broken.
Now, on to today’s forecast.
continued for members…
CL continues to melt down, but VIX and USDJPY have kept futures in the green overnight.
USDJPY has put together an IH&S Pattern that plays out at anything north of 109.09.
VIX is anyone’s guess, but the path to SMA200 at the .618 (the white dot) is wide open. Yesterday, we saw VIX break out of the falling white channel, only to break back in overnight to ramp up futures.
Look for CL to take advantage of the opportunity to register lower prices while stocks are ramping. My new favorite target is 48.17-48.35. 
And, look for SPX to pop back into the broken white channel on the open. Whether it can stay atop the SMA5 200 at 2343 is an open question. 
UPDATE: 9:39 AM
USDJPY is backtesting the neckline as CL continues to fall. I’m probably wrong, but this feels like another pop and drop. I’d try a short position here on any drop through the SMA5 200, now at 2342.91.
UPDATE: 10:15 AM
Worth shorting here at the top of the purple channel with tight stops. It’s a 50:50 shot, as the rising SMA5 10 is almost here. But, the presence of the SMA10 just above at 2348 strengthens the case for a reversal.
UPDATE: 11:33 AM
If SPX doesn’t intend to fall further next week, here’s it’s opportunity to prove it by busting out of the falling purple channel and above its SMA10. I’d cut the short loose on any sustained push through 2349.
The ES version…
UPDATE: 12:03 PM
SPX just popped above the SMA20 and is testing yesterday’s highs. Interestingly, though, USDJPY hasn’t even regained its SMA10 and CL is still stuck beneath its SMA20. This latest run has been all about VIX, which has broken a little (red) TL — but, likely in a backtest of the broken white channel. If this is just a stop running exercise, it should run out of steam here. We’ll keep an eye on VIX and whether it breaks down below 14.40. It might be hard for it to resist the SMA5 200 at 14.26.
UPDATE: 12:22 PM
VIX is popping back out of the white channel as USDJPY runs into the channel top again and SPX is testing the SMA50. This is probably premature, but I’ll try reverting to short here for a backtest of the SMA20 at 2351.48 or the white midline around 2348-2350. If I am early, then we’re probably heading to 2356.93 in 30-45 minutes. And, if I’m wrong altogether, then 2359.55 at midday tomorrow looks like a good target.
UPDATE: 12:44 PM
Here’s the .382 and actual channel top. It’d be easy for VIX to break it out here by simply dropping to its SMA5 200 at 14.29. Watch your stops.
And, watch USDJPY — which is trying to decide whether or not to hold its SMA10.
UPDATE: 1:04 PM
The presumption is that VIX will bounce off its SMA5 200 and SPX will reverse. But, of course, VIX is heavily manipulated. I can’t think of an easier way to break SPX out of its white channel and back test the yellow channel top (2361+) than to smash VIX lower here. Watch VIX, and please watch your stops.
UPDATE: 1:21 PM
Another important moment, as SPX’s SMA5 20 has caught up, USDJPY is at TL support, and VIX’s SMA5 10 has caught down to it after a not-so-strong bounce off its SMA5 200.
UPDATE: 1:29 PM
I’d cut the short loose here as VIX has reversed off the SMA5 10 and is likely headed back below the SMA5 200 and horizontal support. I see no other catalyst for SPX to drop through the SMA50 at this time, as USDJPY is not dropping through the red TL and CL is moving sideways.
I’d hesitate to chase it higher, as the red .618 is only a few points higher at 2359.55 and the yellow channel top is only two points above that. Odds are it’d be If you do, I recommend very tight trailing stops.
Note, also, that ES is coming up on its yellow channel .786 line and white channel top at about 2356.50 — just 1.50 above current levels.
I wouldn’t think about shorting again, until I see it actually reverse — preferably after VIX breaks out again and USDJPY drops through the red TL. I think it’s likely to bounce back and forth between 2355 and 2360 for the rest of the day.
Remember, this meltup was made possible by the presumption (by algos) that USDJPY was breaking out after completing an IH&S Pattern and VIX was heading for its SMA200.
If those things happen — great, there’s much more upside potential. If they don’t, then the downside case is very much intact and this is one of those pre-disaster ramp jobs.
Remember, next week features:
(1) potential war with N. Korea
(2) ongoing war in Syria
(3) next step toward the dissolution of the EU
(4) budget impasse and possible shutdown
(5) continuing meltdown in oil prices
(6) probably other goodies I’m forgetting or haven’t hit the news yet.
This is in addition to many important economic data points including new homes, adv GDP, durable goods, consumer confidence and sentiment.
So, this plunge in VIX and yen is utter rubbish and should be treated with great suspicion. I’m still under the weather, so am going to put on a little more Mark Knopfler and work on some overdue updates.
UPDATE: 1:56 PM
We should get a reversal here at the yellow channel top. It might not turn into much, perhaps just 7 points or so. USDJPY and VIX have yet to confirm. Tight stops are strongly recommended.
It makes perfect sense as a turning point — which is exactly why TPTB might pull out all the stops to try to bust SPX out here.
If they can, then the purple .618 at 2370.86 is the next target. Note that it also represents the neckline of the red IH&S Pattern we discussed several weeks ago.
UPDATE: 3:50 PM
When you strip away all the extra drawings on the charts, the situation is pretty clear. SPX broke out of the rising yellow channel and backtested both it and the 1.618 at 2335 on Mar 27. On Apr 11, however, the yellow channel top broke down again. SPX is now backtesting it as well as the falling white channel. It’s a classic battle between the bulls and the bears.
I’ve been focused on VIX’s SMA200, but failed to recognized that it’s backtesting the midline of its latest rising white channel.
I’m an optimist at heart, so I’d hang on to that short position unless you’re unable to deal with the gap risk.
GLTA.