Well, that was fun.  Just when I was wondering if investors had abdicated all decision making to bullish algos, they woke up and decided that things are a little more complicated than market conditions have been indicating.

Powell says the economy is so great that rates can continue to rise.  This is clearly a double-edged sword, as the 10Y has aptly demonstrated.  Members will remember the flattening of the yield curve poses little threat to stocks.  It’s the rapid steepening that does the damage.It’s pretty obvious, therefore, that Powell is blowing smoke and that interest rates have topped out. Why? Whether of not he employs any chartists at the Fed, I think he’s fully capable of doing the math.

Those who took an economics class or two (or even elementary algebra) can see that a continuing increase in interest rates poses serious problems for this “wonderful” economy of ours.  The tiny increase we’ve seen to date (the black line below) has contributed to a massive increase in interest expense.

Something has to give. And, by “something” I mean interest rates.SPX reached our initial target with ease yesterday, bounced for an hour or so, then tumbled to within 12 points of our next downside target before the obligatory last-minute recovery.This is where things get interesting.  Because, while a tag of the SMA50 and backtest of the January highs would make perfect chart sense, it would mean VIX breaking out of the falling channel it’s been in for months.

While I was wondering whether TPTB would allow such a thing, the employment figures came out and we got one of those trademark VIX plunges we’ve all come to expect.  The message of such a shot across the bow is clear: it can go lower, a lot lower.  Be bullish! Was yesterday’s plunge in equities close enough, in which case the more aggressive channel is in play?  Or, should we expect more fireworks today?  Not to worry. Once VIX breaks out, things will get much uglier.

continued for members…

VIX already pushed slightly above the channel top and SMA200 before crashing back down.

This channel dates back to the Jan-Feb correction, so we know it matters to the men behind the curtain.I don’t think it would be possible to get SPX down to 2872 without VIX breaking out.  And, I don’t think that’s a chance they’re willing to take.  If 2872 fell, the bottom of the white channel is a long ways down.

ES has a more clear cut overhead resistance: the white channel midline where it intersects with the SMA20 and red .382 Fib at 2913-2915.

There is one alternative to VIX breaking out: oil and gas.  It might be possible, if SPX doesn’t ramp up past the SMA20 at 2907, for the coming decline in oil and gas to bring it back down to 2872 without meaning a huge spike in VIX.

This could be accomplished at the end of the day, or over the weekend.  It could also be accomplished so quickly that VIX simply puts in a quick spike which is quickly reversed.

But, the bulls are unlikely to play along – especially given that the very bullish red channel looks like it was almost tagged.  It wasn’t, but we’ve seen bigger misses pass as tags.

USDJPY is another important element of such a plan.  If it were to remain just below the horizontal resistance until the SPX tag occurred, then spike above it, it would likely have little trouble “fixing” the market.

UPDATE:  11:40 AM

VIX just pushed through its SMA200, triggering a short-term buy signal.  SPX and ES are accelerating toward our downside targets, so VIX’s breakout is likely to be brief.  Use stops.

UPDATE:  12:43 PM

Here we are…about time for a reversal, I should think.  We might squeeze another point out of SPX, but ES has already reached its Jan high and both have tagged their SMA50, so it’s questionable.  If I’m right, look for VIX to revert to below its SMA200 and for USDJPY to push above 114.50.

Note that the purple channel has pooped out — unless we get a 60-pt recovery all of a sudden.  The white channel midline and red channel bottom are much more likely to carry the ball from here on – provided SPX bounces now.

If it doesn’t, the next major support levels are 2834, 2818, 2800, 2762 and 2742.92.  The fact that VIX broke out opens the door to all of those. 

Upside targets for SPX, assuming it recovers, are the SMA20 at 2907, the SMA10 at 2917, and the top of the falling white channel at 2925ish.

I have to get on the road soon, so I’m going to sign off for now.  I hope to do a post mortem later this evening.

GLTA.

UPDATE: EOD

SPX dropped as low as 2869.29 before bouncing in the last couple of hours.  ES’ low was 2873.25, after which it bounced as much as 22 points. 

The lower targets remain in place just in case VIX pops back above its close on Monday.  Obviously, the white channels could use further fleshing out.  But, it would mean a drop through January’s highs.

The base case is for the bounce to continue, driven by the usual suspects.

VIX closed (barely) within the falling white channel.

While USDJPY is wedged in between a breakout and breakdown.

Oil and gas are still susceptible to further drops. Though the bond market and banks are closed on Monday, stock markets are open. I’m taking Monday and Tuesday off, though, as I am driving my daughter back to college.

I’ll check in if things go haywire.