More gimmicks, higher highs. It’s getting to be an old story. But, as long as voters and algos don’t know or care, it will continue.
Futures were in danger of giving up Tuesday’s 3421.75 highs when VIX suddenly collapsed by 7% in a matter of seconds.
When that didn’t immediately result in a sufficient boost, it happened again, this time around the jobless claims miss at 8:32 and yet again at 9:02 (by 9.8%) for good measure.
Higher highs, no problem.
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The trade deal: the gift that keeps on giving.
The August trade deficit came in at $67.1 billion, the largest since 2006 – partly a reflection of the pandemic but exacerbated by a 9.3% collapse in the value of the DXY since its March highs.
At the same time, oil and gas prices have spiked sharply higher since reaching our downside targets on Oct 2. So, bond traders can be forgiven for bidding up the 10Y to nearly 0.80%.
If the past is any indication, DXY has much further to go and trade deficits will continue to rise – hardly the outcome the White House promised amid the destructive trade talks in 2018. Remember when the market rallied on every rumored breakthrough?
No worries, though, as VIX “coincidentally” collapsed by 10% in a matter of seconds, thus preserving a positive open.
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It’s not Trump, it’s the algos. While the mainstream media focuses on rumors regarding Trump’s return to office, the algos are zeroed in on VIX’s latest failure push above its 200-DMA.
This is a kitchen sink moment. Oil and gas are pitching in, with 4.5% and 5.5% pops respectively in the pre-market. And, even USDJPY is threatening a bullish 10/20 cross.
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Futures ramped higher overnight, continuing to dance to the tune of VIX’s smackdown and ongoing rumors of a fiscal stimulus deal…
…and ignoring troubling pandemic facts.
But, we’re finally into October and Q4. And, as we discussed yesterday, things are about to get very interesting.
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If our charts are to be believed, we are on the cusp of a significant move in currency pairs and the bond yields.
10Y yields plunged back in March, then began rebounding via a long, drawn-out flag pattern that broke down in late June. Since then, it has been tracing out an equally long, drawn-out triangle pattern that has also broken down.
It has correlated nicely with DXY, albeit with a 2-3 day lead. If TNX’s latest breakdown holds, we might finally see the next leg down in DXY and the long-awaited, significant moves in USDJPY and EURUSD.
Needless to say, the dollar’s demise hasn’t helped the trade deficit, which just reached all-time highs despite White House’s claims to have strengthen the trade picture.
It also doesn’t bode well for stocks. If the past is any indication, October could be a very difficult month.
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A new week, a new breakout in the after-hours for no particular reason.
And, just when the ramp job started to waver, a 5.6% smackdown on VIX – no news, just a reminder not to focus on the pandemic, the millions out of work, our dysfunctional Congress, the coming election battle, Trump’s tax troubles, etc.
Why? Because they can.
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ES is reaching our next downside target right on schedule.
Note that if ES hadn’t spurted past its February highs in late August, falling to our 100-DMA target would have involved a fairly shallow drop of 5.5% and would have preserved the rising white channel.
Instead, we have a 10.8% loss so far and face much greater technical damage if support isn’t retaken – all for the sake of completely unjustified higher all-time highs.
Fear and greed. It’s the same old story when it comes to markets, even in the age of algorithms and central bank interference.
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ES is now off 9.3% from its recent top (-7.8% from our Correction Warning), nailing our 3253 target overnight. The decline has broadened from the overpriced tech stocks to include banks, energy and cyclicals.
The factors we’ve been watching for the past three weeks are all bearish now, and bulls are starting to acknowledge the fundamental risks inherent in the economic and political landscape – not to mention an obvious uptick in coronavirus cases in many significant countries around the world. Contrary to politicians’ cheerleading and assurances of a successful vaccine just around the corner, the pandemic is still very much with us.
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The great thing about channels is that they tell you quite precisely when a trend change has occurred. The falling white channel seen on ES was tested just prior to the open yesterday. A simple smackdown on VIX and it was off to the races.
As we noted at the time, ES’ 10-DMA had dropped to the level of its 20-DMA. Despite a huge ramp job, a bearish cross has indeed occurred.
On the other hand, we have both an FOMC meeting and OPEX this week. On top of the bullish channel breakout, these events seldom fail to produce a rally.
Which will prevail?
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