SPX tagged a significant Fibonacci extension Friday, but ES came up short of its equivalent target at 4728. Meanwhile, CL is faltering and USDJPY is rolling over as VIX faces a bullish 10/20 cross. What does it all mean?
Surprisingly, the answer might lie with the bond market.
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Equity markets rarely fail to rally into the end of the year. But, there have been several noteworthy Q4 exceptions over the years, each of them marked by VIX’s bounce off well-established trend lines.
Note that SPX’s yellow channel has been rising at a compouned 12.2% per year since the 2009 bottom – historically a very decent rate of return. With SPX currently testing the channel top as VIX tests the rising purple trend line, SPX is at a critical juncture where it must either correct or break out.
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Futures are up moderately this morning, bouncing 60 points from their midnight lows on a retreat in VIX. Note that it wasn’t a collapse – the usual response when a rally is resuming.
This lack of algo baiting occurred yesterday, too, when ES completed a Head & Shoulders Pattern and backtested it in a fashion that was reminiscent of the old days, when central bankers didn’t “fix” every little dip.
This highly unusual restraint suggests this dip shouldn’t be bought, but is the next stage of a scripted correction we warned about several weeks ago [see: Correction Watch.]
Our downside case remains intact, with an even more bearish Head & Shoulders Pattern up next.
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Futures reached our next downside target earlier this morning, the Fibonacci retracement at 4348 we added on Sep 9 [see: Just Don’t Call it a Taper.] ES is now off 4.6% since recent highs and 4% since our Correction Watch on Sep 8.
The algo factors, which have propped up stocks for months, are positioned for further losses following their realization that a bounce at the 50-DMA is not guaranteed.
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July retail sales fell 1.1% versus -0.3% consensus, reflecting the impact of stimulus payments, Amazon’s Prime Day change, and the general apprehension surrounding the delta variant.
Yesterday’s bad news faded under heavy algo action, with VIX going into meltdown mode…
…the instant SPX reached its SMA10. 
The bears will get another shot today.
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Annual CPI remained at 5.4%, the highest in 30 years. And, that alarming number masks plenty of data which the BLS methodology simply ignores. Shelter, for instance, registered a 2.8% YoY increase per BLS’ survey-based calculation. Yet observed apartment rents increased at 9.2% in just the first six months of 2021. And, housing prices have been rising at the fastest rate in over 30 years.
Aside from the games played by the government, some non-transitory trends remain concerning: energy, vehicles and commodities all remain quite elevated. Combined with swiftly rising wages, it will be difficult to put this genie back in the bottle.
The algos are more concerned, however, with another overnight smackdown in VIX which sent S&P futures to new highs – for now. Pay attention to where that leaves some important Fib retracement levels.
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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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Neither yesterday’s FOMC announcement nor Powell’s press conference produced any meaningful surprises. Yes, the dots shifted slightly, but everyone knows they’ll shift a lot more before long.
Futures easily reached our initial downside target and came within 5 points (so far) of our second. 
But, the real action was in currencies, which were finally turned loose. Look for EURUSD to finally reach our backtest target where it faces an enormously consequential decision.
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You know when the market is in a holding pattern by how VIX behaves. For the most of the past three weeks, we’ve seen sudden collapses in VIX just ahead of the cash open. It doesn’t always last, but it’s very effective in reminding algos to smack the snooze button, “fixing” any overnight declines and sending ES back to within a few points of its all-time highs.
Almost every day for the past several weeks, investors have turned over and gone back to sleep. But, tomorrow, we’ll get some very important CPI and claims data that could change everything. Are investors in for a rude awakening?
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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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