It was just last Tuesday we asked “where’s the bounce?” SPX had gapped lower and failed to rebound the way it always seems to has for the past year.
We had watched a trend line dating back to Dec 29 (below, in red) break down, and were wondering about the small, white channel. From Where’s the Bounce?
After that, it gets a little messy. ES has an important backtest at 2773, which would be 2730 on SPX — nothing all that important in the vicinity. Below that, however, the white 2.24 at 2703.62 remains very interesting. It would be a hell of a drop from here: 117 points or 4.1%.
The closer we got to 2703, the more plausible it seemed. When we reached it today, though, SPX leveled off for only about 10 minutes before plunging lower. Why?
There are two primary reasons. The first, of course, is VIX. Was there a single session this past year when I didn’t bitch about the degree to which timely beatdowns in VIX were triggering algos to bid up stocks? Doubtful.
After VIX broke out of the falling channel on Friday, Our charts suggested it would reach 16.29 and, if/when that broke, 25.65. 
When 25.65 broke, at approximately 11:48 this morning, it triggered an additional wave of selling from those very same algos which have learned so well to take their clues from VIX’s every twitch. Live by the sword…
The second reason was USDJPY and the ubiquitous yen carry trade. As we noted in our last update [see: Jan 24 Update on USDJPY], the pair reached a channel bottom which represented important support.
We’ve reached the bottom of the rising white channel which has held on four previous occasions since its origin in late 2012…Bottom line, USDJPY isn’t necessarily done until DXY is done. We had bounces at the .500 and .618, so an overshoot to the .786 at 108.90 or even the .886 at 108.16 is a distinct possibility.
As it so happens, the white channel bottom didn’t hold. Despite Kuroda’s desperate jawboning, USDJPY has continued to falter. It backtested trend line resistance yesterday — all well and good.
But, instead of catching support as it almost always does, it broke down. At 11:56, it dropped through a tiny trend line of support. Seconds later, when that TL broke down…
…it broke down through a larger TL of support.
Bottom line, VIX and USDJPY are the two most powerful drivers of algos there are (oil occasionally takes the lead.) When they were going strong…melt up. The slightest hint that they’re not…melt down.
SPX bottomed out yesterday at 2638.17 and closed a good 55 points below the 2.24 Fib. While it’s always scary to see major Fibonacci support fail, there was an obvious effort to keep the uptrend alive. Note the SMA100 crosses the bottom of the rising channel which was established with the Feb 11, 2016 lows. In other words, it’s important.
Significantly, the channel bottom was defined by the Nov 9, 2016 lows. If that date sounds familiar, it was the election night in the US. And, it was the last time a major effort was made to salvage important Fibonacci support. [see: Why the Trump Rally Is a Fraud.]
It worked spectacularly, resulting in a 38% rally. All it took was a 17% spike in USDJPY, a 55% rally in oil, and a 63% collapse in VIX.
How about now? The algos are primed and conditioned to respond. I’m sure Jim Bullard still knows his way to Bloomberg’s studios. Can TPTB manufacture another recovery? For the answer, we need only to examine two similar, previous meltdowns: the night of the US election in Nov 2016, and August 16, 2007.
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