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 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 week is kicking off with a 75-pt ramp job from yesterday’s lows and will feature both a Fed meeting and OPEX. Oh, and VIX gapped down last night. What could go wrong?
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Stocks nailed our second downside target from last Friday [see: Correction Warning.] Judging from the financial press, it was a shock to the average investor. It’s sad that a 4.5% correction would warrant such concern. But, as I often say, that’s the world in which we’re living.
Bulls need February’s highs to hold, while bears are rooting for the algos to follow the direction offered by currencies and bonds.
Many Robin Hood traders and newbie option “investors” are no doubt wondering why they didn’t pick up a good book instead of plunging into the market. These are indeed difficult times.
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Another Thursday, another million filing for unemployment.
Hopefully news of Jeff Bezos’ net worth topping $200 billion will take some of the sting out of being unemployed.
As usual, the futures couldn’t care less, preferring to focus instead on whether or not the Fed will keep refilling the punch bowl following its virtual Jackson Hole shindig.
It’s not as though jobs don’t matter, but…VIX.
All indications are that the Fed will revise its inflation policy to “average inflation targeting,” meaning that it will allow inflation to run above its 2% target following periods where it has run below 2%. This is somewhat analogous to my new policy of dating supermodels only after going more than a month without.
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After a long, dry spell, I’ve had several requests this week for charts for AUDUSD. Given the USD’s weakness of late, this seems like a good time to dust off some very old charts.
In April 2017, we noted that the pair was at important support – its SMA200. If it held, it was in a position to break out of a falling channel. If not…
…should it drop through the SMA200 at .7546, I would not want to be long at all. There’s plenty of downside potential, starting with .6584 – the .886 Fib retracement of the rise from .6006 in Oct 2008 to 1.1079 in July 2011. Should .6584 fail, the October 2008 lows are all that stand in the way of a test of .5493 – the .886 Fib retracement of the rise from .4775 in Apr 2001 to 1.1079.
Then, I pretty much forgot about AUDUSD…until this week. Funny how things turned out. The pair spent over a year bouncing back and forth across the SMA200 until finally breaking down for the last time in April 2018.
From there, it was all downhill until Mar 19, 2020 where it came within .0015 (0.3%) of the .5493 target.
Should we care that it has bounced back to potential overhead resistance?
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It’s been only two weeks since our last update on COMP in which we pointed out COMP might be running out of upside. In that time, the index popped up to an even more compelling reversal point.
Due to its age, the rising white channel that dates back to 2009 is subject to a little wiggle room. What’s not subject to error, though, is the 2.618 Fibonacci extension at 11643.40.
Today, COMP reached the intersection of that Fib and the white channel top – a strong sell signal for an index that seems to have forgotten how to decline.
The thing is…it’s not the only sell signal our charts are giving us.
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COMP: the index that thinks it’s a beanstalk. It’s heavily weighted toward stocks which have done particularly well in the face of the global pandemic: AAPL, MSFT, AMZN, FB and GOOGL. So, a reversal at current levels would be a big deal.
Investors might wish to know, then, that it just bumped up against a chart feature that suggests a reversal.
COMP did a pretty good job of paying attention to channels over the years — at least until 2018. As we noted in our March 2018 update {see: Update on COMP], it had just arrived at our 7619.21 target – the top of a long-term channel and an important Fibonacci extension level. Our comments at the time:
…with a FOMC rate hike due out tomorrow and more on the way, the range of possible outcomes is broad — from new highs to the next lower Fib level at 6227.06.
It reversed as forecast, but pushed back above 7619 in June. The breakout was strong enough, but it fell back below 7619 in October, tagged our 6227 target, then spent almost a year trying to break out once and for all.
By February 2020, it had popped nearly 30% above 7619. Then came the pandemic. The 33% plunge caught many true believers by surprise – though there were plenty of warning signs in both the index and its major components.
The recovery was even more spectacular, with COMP gaining 68% since March 23. Given the amount of money that’s been thrown at the market, investors could be forgiven for believing the rally has plenty of room to go.
The charts suggest otherwise.
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NFP increased by 1.76 million in July, beating estimates of 1.48 million. Futures popped on the news, almost turning green before deciding it was a non-factor – perhaps as Trump had already spilled the beans earlier in the week. Or, perhaps it was due to most of the job gains coming in food service and retail – categories which are susceptible to large downturns if slowdowns and shutdowns continue to make a comeback.
The unemployment rate dropped from 11.1% in June to 10.2% in July, while U6 dropped to 16.5% – still a stunningly large number of unemployed Americans whose benefits have plunged in the past week.
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ES has reached the top of the falling white channel we added a couple of months ago. At 76 points below all-time highs, a 2.2% move higher would make quite a statement about the integrity of the S&P 500 – essentially that a connection between equity prices and macroeconomic conditions is no longer a reality, nor even a consideration in investing. Imagine future FOMC press conferences and the derision that pretenses to the contrary would invite.
Is the Fed ready to cross the Rubicon? Or, could this finally be the end of the road?
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