The great thing about studying how algos dominate the equity markets is that, if you look very carefully, you can see the gears and levers working in the background. In this morning’s pre-market, we can see a number of factors sliding into place which are designed to stop the market’s bleeding.
First, VIX reached our topmost price target of 45.73 overnight. This represents very significant overhead resistance and should be met with heavy selling pressure. It’s a very logical place for central bankers to take a stand if they hope to support stocks.
Next, USDJPY has almost reached our SMA200 target. After its failed breakout, this would be a logical place for the BoJ to attempt to take a stand…
…which, combined with EURUSD reaching our next upside target…
…should allow DXY to get a nice bounce here at our downside target.
CL has also reached our downside target, transitioning from one channel to another less steep channel and beginning an extended bounce which will ultimately result in a tremendous downturn. But, for now, it’s an important place for OPEC et al to take a strong stand.
And, last, the 10Y is bumping up against our highest targets (for this cycle.) A move above 135’155 would unleash another torrent of selling. It’s a very good place to take a stand…
…especially as 2Y yields have reached our 0.95% target.
There are countless other “tells” I could detail – none of which guarantee that the current decline is over – only that a concerted effort is being made to prevent SPX from falling below important support levels to our favorite target at 2703.62.
ES fell below its September 2018 highs (2947) overnight, but is bouncing. The logical implication is that SPX’s Sep 2018 high of 2939.86 will be defended. If it fails, then the 13.3% correction will almost certainly turn into a 20% correction.
This correction seems to have many investors flummoxed. It shouldn’t. By simply paying attention to the charts, these moves can be anticipated. As we noted on the 18th, two sessions before the top:
…be very careful in chasing this breakout. It is built on a very weak algo-driven foundation which, given the coming moves in CL, DXY, USDJPY and TNX, cannot stand. When it cracks, it could be quite violent.
And, on Buckle Up posted on the 20th:
The coronavirus is the wild card, of course. It has the potential to blow all of the above provisions out of the water – starting with the currency and bond picture. A flight to safety which sends ES back below 3336.49 is a clear sell signal.
And, from Just When You Thought it Was Safe on the 21st when we got sell signals from DXY, CL, the 10Y, the 2Y, 2s10s, EURUSD and gold:
ES just tagged 3336.25 – time to bounce if it’s going to. Remember, if it doesn’t bounce, SPX’s 1.618 is way down at 3306.51. And, if these 1.618 extensions don’t hold, it could be game over for stocks.
This is the daily chart posted that day…
…and where we are as of yesterday’s close.
The problem with taking a stand, of course, is that markets are now dominated by algos and an assortment of trend-following robo-investors. These are the very dynamics which made the never-ending rally possible. They now make it very difficult for stocks to find support.
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