The correction is gathering steam, with ES off 40 points earlier this morning before getting a bounce. From a technical standpoint the culprit is VIX, which broke out of the falling channel which has guided stocks higher since March 2020. 
Our downside targets remain unchanged.
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Stocks rarely drop over a 3-day weekend. This one was no exception. The miniscule decline we saw in the futures last night has been all but erased despite a conciliatory 5% bump in VIX to backtest its SMA10. No fuss, no muss.
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ES came within 9 points of our next downside target before getting a nice bounce motivated primarily by USDJPY, which was working flat out to save the NKD from a scary, and long overdue dive to its SMA200.
This bounce will be quite important to the bulls, who are no doubt hoping to avoid a bearish 10/20 cross.
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Not that futures needed any help melting down this morning, but Jim Bullard just poured gas on the fire. Yes, Jim Bullard! The Fed president who never had a hawkish thought in his life.
"We were expecting an inflationary impulse, but this has been more than what we were initially expecting," says James Bullard. "The ideal path in my mind would be the 3% this year will be okay, and then we'll get it down to 2.5% next year and we'll converge to 2% from there." pic.twitter.com/i9vSio57GM
— Squawk Box (@SquawkCNBC) June 18, 2021
Then, he trashed the Fed’s most nonsensical policy: throwing $40 billion per month into the mortgage market when mortgage rates are already at all-time lows.
"I'm leaning a little bit toward the idea that maybe we don't need to be in mortgage-backed securities with a booming housing market and even a threatening housing bubble … we don't want to get back in the housing bubble game," says St. Louis Fed President James Bullard. pic.twitter.com/fDMkw9ckL9
— Squawk Box (@SquawkCNBC) June 18, 2021
Bulls better hope that ES can bounce at our next downside target: the 50-day moving average currently at 4174.
It appears that algos are finally being given the green light to (drumroll please) decline.
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If yesterday’s better than expected ADP jobs data was bad news, then it stands to reason that today’s worse than expected DOL NFP print would be good for the market. 
Well, that, and the 13% pounding VIX has taken…
As it was hammered back below its SMA10, ES was ramped up above its SMA10. Funny how that works.
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BTC reached our next downside target at the SMA200 [see: May 13 BTC Update] and plunged right through to the next downside target at 30,108 well ahead of schedule.
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In our last update on Bitcoin [see: Apr 13 Update] we noted that BTC would likely reverse at the Fib extension at 62,977.
It is fitting that BTC chose the day the latest CPI data is released to reach our next upside target [f]rom Bonds Not Buying It on Feb 23…
As always, our approach is to look for a pullback upon reaching these major Fib levels, but be prepared to be stopped out if/when it pushes through them. It has required nerves of steel, but has also been an exercise in patience.
As it turned out, BTC worked very hard to unnerve us, pushing through 62,977 for three more days before reversing hard. It reached our initial downside target of 59,010 on the 18th and the channel bottom at 48,837 a few days later.
By the time that bounce reached the channel and cloud top on the 29th, however, the technical picture had eroded. From Not Transitory:
Bitcoin’s cloud problems are confirmed by its RSI. It’s perhaps time for the channel to finally break down and for BTC to start eyeing its SMA200.
This catches us up to today, as BTC’s channel indeed broke down, allowing it to tag our 46,433 target earlier this morning.
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It comes as no surprise that PPI confirmed yesterday’s hot CPI print, coming in at a whopping 6.2%.
We’ve been beating the inflation drum for so long, it feels a bit anticlimactic to acknowledge that it’s finally here and even slightly greater than we anticipated.
As regular readers well know, I expected central bankers to preemptively head off the problem of higher inflation and higher interest rates by crashing oil/gas prices as they have many times before.
I was surprised to see them pass on this approach and roll the dice with inflation. But, it made more sense once it became apparent that they had essentially taken control of the bond market – the one market that had always “told the truth” about economic conditions. No more.
As strong as yesterday’s equity selloff was, the 10Y barely budged, rising from a high on Tuesday of 1.63% to a high on Wednesday (after CPI was announced) of 1.69%. Today, yields are actually dropping. An orderly channel like the one below is all you need to confirm that yields are being carefully managed.
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Speaking of carefully managing things…I can only imagine the panic around the Fed, the Treasury and the White House when the Colonial Pipeline fiasco popped up the other day. Higher oil/gas prices had helped get stocks to their recent highs, but it was time for the market’s caretakers to take their feet off the gas lest inflation be even more alarming.
A shutdown of the nation’s largest fuel pipeline certainly wasn’t part of the plan – though I wouldn’t be surprised if the hackers had placed some well-timed bets on oil/gas prices in advance. With markets going crazy over inflation, something had to give.
I had the following conversation on this very topic with a very good friend who happens to be both brilliant and an excellent trader. But, he’s nowhere near as cynical as I am. We chatted just after the close.
Less than ten minutes later…
RBOB futures are off nearly 6% from Friday’s highs.
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With futures having already dipped below the SMA50 to tag a key target earlier this morning, the bounce should continue given the algo action focused on VIX.
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Futures are flat after tumbling to and holding our backtest target yesterday morning. But, pay no attention to stocks just yet. They should continue to be under pressure, with the real action in oil and gas.
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It is fitting that BTC chose the day the latest CPI data is released to reach our next upside target. From Bonds Not Buying It on Feb 23:
BTC even managed a proper backtest of the last major Fib level, opening the door to the next upside target at the purple 3.618 extension at 62,977.
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