Though it is getting a little monotonous, I’ll never get tired of saying that we’re about to tag our next downside target.
The past two weeks of downside have been a great recruiting tool for chart patterns and this website in particular.
A note to prospective members…we’re currently offering auto-renew monthly subscriptions at half-off the first month. To sign up, CLICK HERE.
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As a chartist, I’m often struck by how similarly the stock market acts at important tops and bottoms. By “important tops” I’m speaking of those which precede large corrections or even crashes. So, with apologies to Tim Knight’s excellent Slope of Hope…
In 2000, SPX retraced a Fibonacci 88.6% of its initial drop before falling off a cliff. If you were to draw a trend line (TL) between the two tops, it would take on the slope of the yellow line below.
The 2007 top was completely different: no big retracement, no place for a trend line with a similar shallow a slope to connect, just a setup for a gag featuring a roadrunner and a coyote.
But, in 2011, we saw the pattern all over again: an 88.6% retracement and a very similar TL.
What many didn’t realize at the time was that the TL from 2007 TL was simply making a return appearance.
Isn’t it interesting, then, that the slope of the line between the Sep 21, 2018 high and today’s high (and passes through the 88.6% Fib retracement) is exactly the same?
The Big Picture…
Is it possible that all the bad economic and earnings news we’ve had these past few months is just…bad news?
I was on the road yesterday, so I listened to CNBC on XM while tooling around town. I lost count of how many pundits sounded downright angry about how the market was melting up. “It makes no sense!” they cried, citing countless statistics from plunging retail sales to plunging earnings expectations. Not one of them brought up VIX.
In a market where most of the trading is by computers which are merely responding to preprogrammed signals (aka algorithms) it has become quite simple to nudge the market one way or another.
Given that COMP has really struggled to get and stay above its SMA200, VIX is telling the computers to buy. It already got the ball rolling by plunging below its SMA200 and is now reiterating the signal by simply breaking down below the red channel bottom.
This is a well-worn trick, illustrated best by the period 2015-2016. Every time SPX needed to get back above its SMA200 (in order to delay the 1823 tag until the channel bottom arrived in Feb 2016)…
…VIX was there with an assist, dropping below its own SMA200 (the red moving average.) When things got really dicey and a big push was needed, VIX broke down below the well-established trend lines (below in red.)
Now that it’s doing the same thing again, and oil and gas, interest rates and currencies are all following suit, the message is unmistakable: buy, machines, buy!
Will the few remaining carbon-based investors also comply?
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Yesterday’s setup for the e-minis looked pretty straightforward: a drop through the 200-day moving average and backtest of the 2.24 Fibonacci extension at 2729. Futures had already dropped through the 200-DMA and were heading south when the dismal retail sales data dropped.
I hedged my bet, redrawing our daily downside target to include the 10-DMA — just a few points below the Fib extension.
Fifteen minutes into the session, as ES reached 2730.25, the headlines started dribbling in. Fed Governor Lael Brainard publicly commented that QT should end this year, ahead of schedule. Larry Kudlow commented that there was a glitch in the retail sales data. Mnuchin felt all warm and fuzzy about the trade talks.
Faster than you could say “Plunge Protection Team” ES reversed course and SPX closed the day with a gain. But, the move didn’t feel finished. As I wrote at the end of the day:
ES looks likely to test its SMA200 all over again. But, will it make it on down to the 2.24? Its SMA10 will probably be up to 2728 by tomorrow morning, adding additional support.
I guess the market fairies were listening, because that’s exactly what happened overnight. ES dipped to 2729 right as the SMA10 was arriving on the scene, then spurted 27 points higher — breaking out of the falling white channel in the process.
The algos are in full support mode at present, though a few charts suggest a pop and drop is in the cards if VIX doesn’t pull off a game changing plunge.
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SUBSCRIBERS: Just updated our forecast page, including RB, CL, DXY, USDJPY, EURUSD, SPX/ES, Gold, VIX, COMP, DJIA, AAPL and bonds. Check it out HERE.
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Rumbling toward the end zone, the bears ran into the bulls’ best defender: VIX. As ES tagged our channel-line target a day ahead of schedule (and, therefore at a lower price)…
…VIX took the opportunity to plunge back below its 200-DMA. 
Fortunately, we saw it coming a mile away courtesy of DJIA, which signaled the end of the decline with a precisely executed (random walk, my ass) tag of its 200-DMA. As usual, the refs pretend not to notice when the bulls are caught cheating…
This sent SPX back above its 2.24 Fib at 2703 just in time for the close. All things considered, it was a successful goal-line stand.
Unfortunately for the bulls, however, VIX couldn’t hold its stance overnight and is back above the 200-DMA as ES tests yesterday’s lows. And, rates are itching to tag our next downside target — a headwind for stocks.
The algos will have their work cut out for them today.
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Nothing much has changed since yesterday. SPX bounced around in our target zone, coming within a few points of its SMA200 as VIX went nowhere.
The one notable exception was AAPL, which after tagging our downside target on Jan 3 $from last November [see: AAPL Discovers Gravity] reached our upside target yesterday. 
We originally charted this upside target on Jan 3 [see: Update on AAPL, Jan 3] and the IH&S pattern reinforced it three weeks later. Had AAPL not reversed, the additional downside potential was substantial.
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It is often said that there are two sides to every story and, somewhere in middle, lies the price of oil. Okay, I paraphrased that just a bit.
But, isn’t it odd that the day after the Saudis threaten $400/barrel oil, Donald Trump suddenly embraces the ludicrous “rogue killers” theory for the death of Washington Post columnist Jamal Khashoggi?
It appears that after days of vehement denials of any involvement, the Saudis suddenly remembered that Khashoggi was, in fact, assassinated and dismembered in their Turkish embassy (Saudi operative: “Oh, yeah…that guy that we chopped up with a bone saw? I had forgotten all about that!)
After a 20-minute conversation, the president who fell in love with Kim Jong-un also came to terms with Saudi King Salman. Was it love? To quote the master of the deal, himself, who knows?
But since Trump is desperate to reverse the rise in gas prices, inflation, and interest rates between now and November 6 (and, to salvage billions in arms sales) don’t be surprised if we get that next leg down in oil prices very soon. Nobody knew the economy could be so complicated!
And, while we’re on the topic of government prevarication, the much-delayed September Treasury Statement was finally released yesterday. Anyone notice something odd about September outlays? Did we really see a plunge in every expense category? Or, maybe, someone decided to massage the numbers just a bit to prevent the report of a $1 trillion deficit. Appearances, again.
Nah…then we’d surely see other efforts to obfuscate the country’s fiscal plight. For instance, they’d never allow charts like this one from the August report.
The same chart in September… (appearances, indeed!)
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SPX came within 7 points of our downside target yesterday, getting a midday bounce that couldn’t quite reach the 200-DMA. Futures popped as high as 73 points off the intraday lows, but have since given back about 12 of those points and are perched barely above ES SMA200 at a 28-pt gain in the after-hours.
If those gains hold, it still won’t be enough to ramp SPX back above its 200-DMA. What’s more, USDJPY, RB and CL have further to fall, VIX has additional upside potential and DJIA and COMP remain below their 200-DMAs. Despite the after-hours euphoria, stocks aren’t out of the woods just yet.
One economic item which doesn’t usually attract that much attention, but might today: Treasury Budget. The trend hasn’t been very positive lately as witnessed by the widening gap between outlays and receipts.
For excellent commentary on the problems this poses, see Jeffrey Gundlach’s interview on CNBC yesterday. The latest is due out at 2pm. From Briefing.com:
Export and import prices are also due out (8:30am.) These will get extra scrutiny to see what impact tariffs have had on prices so far. And, Michigan Consumer Sentiment (10am) frequently impacts markets.
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A quick glance at NFLX’s daily chart shows it has significant additional downside potential.
The most obvious downside target is the 100-DMA at 338.73. But, the 200-DMA is approaching the white channel midline and should cross it at around 298-300 on or about August 6. It makes for a nice downside target if the SMA100 doesn’t hold.
Should the SMA200 and channel midline fail, the bottom of the white channel is currently around 200 and (obviously) rising.
As an aside… I’ve been mystified as to the value ascribed to the company based on its ability to produce original content. What about the risk? Anyone who has worked in film or television can tell you that most productions don’t turn a profit.
I don’t want to get into production. There are passionate, talented filmmakers out there and I would pollute the craft.
Reed Hastings, Inc Magazine: Dec 1, 2005
Netflix has clearly hit some home runs with House of Cards, Stranger Things, etc. And, theoretically, producing content in-house can lower acquisition cost and diversify revenues.
But, extrapolating an unending string of popular and profitable productions is just plain silly. Some would say borrowing $1.8 billion to fund said productions is downright reckless.
Think New Line, which followed up the hugely successful Lord of the Rings trilogy with the expensive flop The Golden Compass. Investors would do well to remember that beta works in both directions.
UPDATE: July 17
We’re off to a good start.
It was just last Tuesday we asked “where’s the bounce?” SPX had gapped lower and failed to rebound the way it always seems to has for the past year.
We had watched a trend line dating back to Dec 29 (below, in red) break down, and were wondering about the small, white channel. From Where’s the Bounce?
After that, it gets a little messy. ES has an important backtest at 2773, which would be 2730 on SPX — nothing all that important in the vicinity. Below that, however, the white 2.24 at 2703.62 remains very interesting. It would be a hell of a drop from here: 117 points or 4.1%.
The closer we got to 2703, the more plausible it seemed. When we reached it today, though, SPX leveled off for only about 10 minutes before plunging lower. Why?
There are two primary reasons. The first, of course, is VIX. Was there a single session this past year when I didn’t bitch about the degree to which timely beatdowns in VIX were triggering algos to bid up stocks? Doubtful.
After VIX broke out of the falling channel on Friday, Our charts suggested it would reach 16.29 and, if/when that broke, 25.65. 
When 25.65 broke, at approximately 11:48 this morning, it triggered an additional wave of selling from those very same algos which have learned so well to take their clues from VIX’s every twitch. Live by the sword…
The second reason was USDJPY and the ubiquitous yen carry trade. As we noted in our last update [see: Jan 24 Update on USDJPY], the pair reached a channel bottom which represented important support.
We’ve reached the bottom of the rising white channel which has held on four previous occasions since its origin in late 2012…Bottom line, USDJPY isn’t necessarily done until DXY is done. We had bounces at the .500 and .618, so an overshoot to the .786 at 108.90 or even the .886 at 108.16 is a distinct possibility.
As it so happens, the white channel bottom didn’t hold. Despite Kuroda’s desperate jawboning, USDJPY has continued to falter. It backtested trend line resistance yesterday — all well and good.
But, instead of catching support as it almost always does, it broke down. At 11:56, it dropped through a tiny trend line of support. Seconds later, when that TL broke down…
…it broke down through a larger TL of support.
Bottom line, VIX and USDJPY are the two most powerful drivers of algos there are (oil occasionally takes the lead.) When they were going strong…melt up. The slightest hint that they’re not…melt down.
SPX bottomed out yesterday at 2638.17 and closed a good 55 points below the 2.24 Fib. While it’s always scary to see major Fibonacci support fail, there was an obvious effort to keep the uptrend alive. Note the SMA100 crosses the bottom of the rising channel which was established with the Feb 11, 2016 lows. In other words, it’s important.
Significantly, the channel bottom was defined by the Nov 9, 2016 lows. If that date sounds familiar, it was the election night in the US. And, it was the last time a major effort was made to salvage important Fibonacci support. [see: Why the Trump Rally Is a Fraud.]
It worked spectacularly, resulting in a 38% rally. All it took was a 17% spike in USDJPY, a 55% rally in oil, and a 63% collapse in VIX.
How about now? The algos are primed and conditioned to respond. I’m sure Jim Bullard still knows his way to Bloomberg’s studios. Can TPTB manufacture another recovery? For the answer, we need only to examine two similar, previous meltdowns: the night of the US election in Nov 2016, and August 16, 2007.
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