There’s a lot to unpack this morning, as several targets were tagged overnight. USDJPY finally popped up to tag its 200-DMA…
…which enabled ES to come within 1.43 of our 3076.93 target – the 2.618 Fib extension of the drop between 2007-2009. I thought this was going to happen over the weekend, but better late then never.
It’s been a while since we had a nice pop and drop. Stay tuned.
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It’s the last day of a short week packed with more important economic data — which the market has managed to ignore so far. Today might be a little different, as the spike in the savings rate and the collapse in consumption confirm a troubled road ahead for the strong consumer narrative. Gee, could 25% unemployment actually begin to matter?
Ignore the spike in personal income, as it reflects the massive government stimulus checks sent out last month.
The PCE deflator also surprised, plunging almost to 2009 levels. 
So far, the futures have managed a muted reaction, with a likely falling wedge setting up following yesterday’s reversal at our channel midline target.
But, with China trouble, riots in Minneapolis, and Trump taking a swing at social media darlings, maybe the data will matter for a change.
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Headline CPI fell 0.8% MoM – the biggest drop since 2008…
…thanks primarily to plunging energy prices.
Core CPI fell 0.4% MoM, the biggest drop since it began being tracked in 1961.
The details show strong upticks in food and medical care but weakness almost everywhere else.
Like almost all economic data lately, the algos have chosen to ignore inflation, as VIX dropped another 7.7% from its overnight highs. For the moment, nothing else seems to matter much.
VIX has fallen from 47.77 to 26.37, a 45% decline, since ES backtested its 2.24 Fib extension on April 21. SPX has climbed a total of 8% during that time – with the great majority of its gains on overnight ramp jobs driven by plunges in VIX.
Today, the algos are also watching the bond market quite closely, as the Fed is slated to dip its toe into corporate bonds – including junk bonds – for the first time.
What could go wrong?
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In a bit of a delayed reaction to Treasury’s announcement of its $3 trillion borrowing needs in Q2, the 2s10s has pushed above the white TL connecting all-time lows – a clear warning, should it last, for equities.
Meanwhile, CL backtested its Feb 2016 lows and USDJPY broke down at about the same time that ADP announced another 20 million job losses (roughly in line with Friday’s NFP.) All of this came on the back of dismal earnings from market darling Disney.
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It’s a day we all knew was coming — over 1 million cases of coronavirus cases officially diagnosed in the US, over 3 million worldwide. Experts such as Scott Gottlieb, former head of the FDA, estimate that actual US cases are 10 to 20 times the reported figure. Deaths currently stand at 56,803 – about 30% of all closed cases.
Social distancing has slowed the rate at which new cases are being diagnosed. But, with many states reopening, a shortage of tests, no contact tracing, and no viable therapeutic or vaccine yet available, the number of cases and deaths seems likely to accelerate.
The market continues its oblivious ways with last night’s low-volume meltup good for about 1.5% so far as the Fed begins its two-day meeting.
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In our last formal update on gold in January [see: Jan 2 Update on Gold] with GC trading at 1529, I noted that although DXY had held up well, gold should benefit from loose Fed policy – but could see a backtest of its SMA200 based on the oil/gas meltdown we expected.
I am partial, though, to the Fed putting the damper on inflation in January (reported in Feb) and setting up a backtest of the SMA200 or even the neckline which would set up another leg up to 1710-1735 in Oct 2021 or Jan 2022. Note that this would tie in nicely with the idea of an oil/gas meltdown in 2023.
We certainly got all those things, but the timing was just a tad off.
Long time members will remember I’ve been writing about gold’s potential Inverted Head & Shoulders Pattern for years. This post from September 2017 comes to mind.
As I stated in that last update, I think TPTB will do whatever it takes to keep that giant IH&S targeting 1721 from playing out. The only thing I can see outweighing their efforts would be a true black swan event such as open warfare on the Korean Peninsula.
Sure enough, every time GC got close to that neckline (the dashed yellow line above), it was smacked down by as much as 18%. It has happened 9 times since July 2016. It was nice for trading purposes, but frustrating to the many gold bugs out there.
While rising oil and gas prices were helpful to Aramco’s share offering in 2019, they disrupted the delicate balance between inflation and interest rates and sent a clear signal that it was finally time for GC to break out — which it finally did last June.
Since then, it’s been a matter of waiting for the rising price channel to reach our upside targets. It might have been a long wait if not for the coronavirus. We managed to avoid war with North Korea, but this smaller, deadlier enemy was plenty Black Swan enough for the Fed.
A few trillion in QE later, GC has reached our 1735 target — well ahead of schedule and after a very dramatic SMA200 backtest.
Is the run over, or is there more to come?
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The futures are lock limit down again this morning, with ETFs trading in the after-hours indicating losses on the (eventual) open of up to 10%. This is probably not what the Fed had in mind when they unleashed the massive, emergency rate cut and $700 billion in new QE an hour before the futures opened on Sunday.
As before, the factors are all aligned bearishly, with the bond market failing to swing back to a bullish alignment yet despite the Fed’s desperation move. There are, however, some glimmers of hope.
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Two charts best define the day we had yesterday.
First, VIX tagged our next highest target: the intersection of the .786 Fibonacci retracement and the trend line connecting two previous highs.
The other one was the SPX arithmetic (as opposed to log) chart, which stopped on a dime at the channel bottom.
The bleeding continued well past the Fed’s ineffectual $1.5 trillion injection and had to wait until the low-volume aftermarket to be staunched. At that point, central bankers went to work – pumping oil and gas, the dollar, interest rates and currencies in order to restore confidence whip up the algos. It worked…at least so far.
I’ll have a separate post up later regarding COVID-19, including my latest projections for the US.
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Once upon a time, a few boys whose families owned the biggest lemon groves in town got together and opened up a lemonade stand. It was a very hot summer, so they sold an enormous amount of ice-cold lemonade. Since they controlled the supply of lemons, they were able to quickly raise prices from 10 cents per glass to as much as $1.50. Their customers didn’t mind as they could afford 1.50, it was excellent lemonade, and there were no alternatives. They like it so much, in fact, they invested $2 trillion in shares of the stand.
One day a freak storm hit town, and the temperature dropped from 95 to 25 degrees in a matter of hours. The weatherman said it could last for months. Not many people were interested in ice-cold lemonade, even though the boys frantically dropped their prices. They even tried cutting back on the amount of lemonade they made. For some reason, this had no effect on sales, and prices continued to drop. A few boys split away from the group and tried selling cheaper lemonade on their own, but this further depressed prices. Soon, the lemonade stand went out of business. The end.
And that, boys and girls, is how OPEC came to be in their current predicament.
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We start this morning’s post with a peek at the Russell 2000 as it perfectly illustrates the dilemma facing the broader markets this morning.
Up until September 2017, RUT followed a well-defined rising channel shown below in yellow. Like all channels, it was defined by the tops and bottoms along the way. The only problem: The channel was rising only about 5% per year – hardly enough to get excited about.
By late 2016, it had become obvious that algos had more influence than discretionary, fundamentally-oriented investors. The algos were, in turn, influenced by certain factors which central banks and their proxies could usually control quite easily. By wagging the tail (the factors) the whole dog (the market) would usually fall in line.
In September 2017, after RUT had been bumping up against the top of the rising yellow channel for over 9 months, the factors went to work and RUT broke out of the yellow channel and rose 21% over the next year. The slope of the new rising white channel was good for about 20% per year.
Everything was going well until September 2018 when RUT topped out at 1742 and plunged 27% in only three months. To make matters worse, the new rising white channel broke down and RUT fell back below the top of the yellow channel from which it had broken out.
It spent the better part of the next year trying to break out of the yellow channel again – failing seven times until Dec 4, 2019, when it finally shot above the channel top and remained there. There was a scare last month when, on Jan 31, it successfully backtested the channel top and bounced 5.5%.
Given yesterday’s carnage, though, it has fallen back to the top of the yellow channel where it faces that same important test all over again. If it holds, all is well and investors can go back to mindless trend following.
Even if it doesn’t, the SMA200 is now up to 1574, a modest 3.3% below yesterday’s close. But dropping through 1616ish would mean breaking down below the horizontal support (which served as overhead resistance between Oct 2018 and Dec 2019.) It could accelerate losses and complicate the rescue mission.
RUT is typical of many of the indices and individual equities I chart every day. The Dow, for instance, faces a similar test at 27,700.
And, SPX and ES completed important backtests (the purple channel top below) in the process of tagging our next downside targets yesterday.
Given the way the factors are behaving this morning, there is a good possibility that we’ll see additional backtest targets such as DJIA 27,700 tested today. But, that would mean taking a chance on the algos’ ability to rescue stocks from some very risky waters.
Stay tuned.
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