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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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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Let’s talk about inflation. At 0.4%, both headline and core handily beat consensus of 0.3% and 0.2%. Why?
This morning’s CPI release is a treasure trove of information regarding price action in the general economy. On an annual basis, energy tanked and food soared. MoM, food was still strong while energy and used cars soared in value.
So far, the market isn’t concerned. It should be.
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Maybe the Fed had it right, leaving the door open to higher inflation. Though August headline PPI came in slightly higher than expected at 0.3% vs 0.2%, core PPI rose 0.4% versus 0.2% expected.
S&P futures sold off 8 points on the news, but the algos had other ideas. 
As is often the case, “someone” hammered VIX and it tumbled back below its 200-DMA at 8:39. The algos were only too happy to oblige, breaking ES out of its latest falling channel.
Honestly, who needs economic data? Why not just have the Fed trading desk announce the day’s high, low and close every morning?
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S&P 500 futures have bounced 77 points off their 50-DMA overnight lows, a substantial sum but not yet enough to break out of ES’ falling wedge which would be tested at 3380-3385.
It raises the question: is this a garden variety pause or is the excitement over?
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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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After a couple of days of VIX rising while stocks spiked higher, it only makes sense that VIX is falling while stocks are tumbling. This is the bizzaro world in which we’re living.
Unless it bounces sharply on our channel bottom target today, add CL to the list of algo drivers which have experienced a bearish (for stocks) 10/20 cross. It has been in a bullish alignment since May 11.
Recall that RB crossed on Tuesday and USDJPY crossed on Aug 27. Despite the administration’s insistence that everything is peachy, the evidence is building that the market will finally take notice of the economy’s dire straits.
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