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After SPX’s break out on the back of a 37% plunge in VIX, it’s no surprise that the VIX has kept it within striking distance of new all-time highs.

In dropping that 37%, VIX completed a deep retracement of its rise from 9.97 — the lowest it’s been since 2007 — to 16.28.  The .886 retracement is considered the last stop before prices drop through the previous lows.  Imagine: risk being considered lower than at any time since 2007!

Yesterday, VIX spent the entire day dancing around that .886, with a dip below it every single time SPX started slipping.  The message to algos was that VIX was about to drop to new lows and, therefore, stocks should be bought.It was enough to keep SPX from completing a simple retracement from its .886 to its .786, or any meaningful dip until the final minutes of an otherwise nonsensical session.Today’s a new day, as CL is closing in on our 48.35-48.45 target and investors are no doubt anxious to express their disappointment with the lack of details provided for the fantastic, big-league tax cuts “revealed” yesterday.

Despite the slight bump in futures overnight, our downside targets remain intact – starting with 2384.

continued for members…

USDJPY continues to hold above the white channel midline, and should be used as a regulator for SPX as it was yesterday.

A closeup of CL’s coming channel tag, after which we should get a nice bounce.

SPX’s rising white channel probably needs to be tilted a bit to reflect yesterday’s highs. Here’s the adjusted version.Note that despite its 2-3 point gains, ES has broken down through the bottom of yesterday’s small white channel.  It has clearly been supported at the .786, so this disparity with SPX could continue to be a challenge for SPX 2384. How to dip below it without triggering stops and triggering the selling that should ensue as the H&S completes?

It would have to be very fast, and would likely need a catalyst, such as CL’s final drop to 48.17-48.45 or VIX’s rally up to backtest the broken white channel at 11.45.UPDATE:  10:15 AM

SPX just backtested the red TL and the SMA5 20. It should be a good place to short for those who didn’t hold short overnight.If it’s going to happen, we should see CL dip to 48.17-48.45 or lower……and USDJPY dip to 111.14.9 or lower.  VIX would help tremendously by backtesting (11.45ish) the white channel bottom it broke down through on Monday.UPDATE:  10:41 AM

In addition to the H&S Pattern which has set up on ES, SPX faces a small pattern that targets the gap fill at 2376.98.  I wouldn’t be shocked if they ditched the .786 backtest altogether, as the risks might outweigh the reward of a more legit chart pattern.If it happens, expect it to be very quick, or to break down and extend beyond 2384 to fill the gap at 2376.98.  I know it’s only a few points difference — less than 1/2% in the scheme of things.  But, those charged with driving the markets to new highs are justifiably very nervous about allowing SPX to break trend.

UPDATE:  10:52 AM

There’s the .786.  I’d cover here, but be prepared to re-short if it doesn’t bounce very quickly.Note that USDJPY and CL have both nailed our targets — with USDJPY slipping a little below.  Remember, we’re still looking for lower on CL.  So, long positions should include a relatively tight stop. UPDATE:  10:56 AM

SPX is slipping through the .786 on USDJPY dipping below 111.14 and VIX rising to a new intra-day high.CL is starting to bounce, however, which could stave off a further drop.  And, VIX is backing off its earlier pop.  I’d stay long for as long as SPX can remain above 2384.  With any luck, they can get SPX back to its neckline (2386.83), and use big pops in CL and USDJPY (and, VIX back below 10.69, of course) to leapfrog the SMAs at that point.

UPDATE:  11:39 AM

We’re past the euro close and USDJPY is still slipping, and VIX hasn’t taken evasive maneuvers yet.  CL has yet to put on an impressive move.  I’d switch back to short here for a dip to 2376.57.  Tight stops are recommended as the BoJ could start panicking at any moment.UPDATE:  11:51 PM

FWIW, note that the little falling wedge setting up on SPX points directly to the white target we had set at the .618 the other day.  Not saying it will reach it, as that would require SPX to drop through the purple midline at 2381ish and the .707 Fib.  But, it is the bottom of the rising white channel, which is why I charted it in the first place.It would also require VIX to more than backtest the broken white channel — which I would think TPTB are very leery of.

UPDATE:  12:13 PM

The BoJ is freaking out a bit, as USDJPY is back inside the rising red channel and is pushing above its short-term SMAs.  This has put SPX and ES back above their ST SMAs, which casts some doubt on our next lower targets.  Keep a close eye on your stops. To further muddy the waters, VIX has dipped below it’s own SMA5 10/20.UPDATE:  12:35 PM

This is looking pretty sketchy.  Either it’s a nice head fake, or they’re going to try and bust the H&S Pattern.  It’s important that VIX hold the rising red TL here and get back above its SMA5 10/20.  SPX has already backtested the red neckline, so there’s no need for another.  Yet USDJPY keeps threatening to break out, and CL is spiking higher.  I’d ditch the short here but be prepared to re-short.  If it pops above the red neckline — also the white midline — I’d want to be long. UPDATE:  12:44 PM

Moment of truth for SPX.  If it doesn’t break out, it has merely widened the falling red channel — which is more bearish than the falling wedge it had created earlier.  Gauging from VIX, CL and USDJPY, I suspect it’ll break out.  I’ll try a long position here with tight stops, but watch out for the SMA5 50 just above, and the SMA5 200 above that. UPDATE:  1:02 PM

SPX has reached the .886.  I’d close the long position here, only since USDJPY is tumbling and VIX is bouncing off the red TL.  I fully expect to be reopening it shortly, as soon as SPX backtests the SMA5 200.  But, there is plenty of bad news floating around today.  It’s possible some it might even filter into the “market.”  I’d go back to short if SPX drops back through the SMA5 200 at 2390. UPDATE:  1:33 PM

Probably just a head fake, but I’d try shorting here on the drop through the SMA5 200 and SMA5 10.  Tight stops, of course, and watch out of the white channel midline at 2387ish.  If they can get it back above the SMA5 200, I’d promptly ditch the short.I have to jump on a conference call, will be back in 10-15 minutes.

UPDATE:  2:29 PM

Not much movement yet.  SPX didn’t hold the SMA5 20, and is now testing the white channel midline.  CL has backtested its SMA200, and might well push above it if necessary.  USDJPY continues to look quite weak following that initial pop.  Again, back to long if it pops through the SMA5 200.  I would think that, between CL breaking out and VIX breaking down below the red TL, they could break SPX out. UPDATE:  2:35 PM

Here we go.  VIX has broken down and CL has broken out.  Back to long if it blows through 2390.37.  Just need USDJPY to get on board… UPDATE:  2:55 PM

Remember, we’ve been in this same situation before.  Last Friday, the news cycle was looking rather bleak.  The only thing which has really changed since then is the French election, the actual results of which were widely expected.  But, by hanging on until the close on a Friday, TPTB were able to engineer a breakout. 

If they can prop up SPX at the white channel midline, they could accomplish the same thing overnight tonight — engineering new highs.  Unless we get a break down in the next hour, I’d be nervous about holding short overnight.  And, obviously, there’s still the possibility that they are able to break out here and now.  Stay on your toes! UPDATE:  3:48 PM

Coming up on the close, and they’ve managed to keep SPX above the neckline — mostly through VIX breaking down further.  As always, only hold short if you can deal with the gap risk or hedge.

 

 

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BTW, I will be out of the office after 10:15 AM tomorrow,
as well as all day Friday, May 5 and Monday, May 9.