As long as interest rates remain low, higher inflation – transitory or not – doesn’t concern the Fed much. Given the mountains of debt we’ve accumulated, any breakout in rates is quite concerning. So, investors are understandably nervous when they see the 10Y threaten to break out of a consolidation pattern.

The Fed’s dilemma is that oil, the initial cause of the sharp rise in inflation, was also a significant cause of stocks rebounding.

Algos love the reflation trade – to a point. When rates get too high, it typically means that oil has risen too high. The Fed needs both inflation and oil prices to level off or reverse here, which is why the market is correctly very nervous.

Some might even remember October 2018 [see: Suddenly Interest Rates Matter] when rates threatened to break out of a very long term channel. They could only be corralled by a 45% decline in oil and the subsequent 21% decline in SPX.

continued for members…

Many forecasters are calling for the 10Y to reach 2%. It should. In fact, it should be well above 2% already. But, the Fed has successfully held rates down by buying up every bond in sight.It can’t do that very well if it tapers or ends QE.  So, the Fed needs to find a way to moderate CPI and bring interest rates down sharply before the calls for tapering/ending QE get too loud. The solution to both remains ending the rise in oil/gas prices.

Equities will correct, but as they do interest rates should respond quickly (bonds are bid.)  The timing for touchdown is looking like between Oct 12-16. That timing looks good for VIX as well.To be clear, CL needn’t drop by 45%. It simply needs to stop rising and show signs of stabilizing or dropping slightly. The YoY effects could take care of bringing inflation back down as long as other prices level off or drop – easier said than done, I know.We saw an example of how this works back in July. RB’s rising wedge broke down (for a whole day, the first yellow arrow)… …which sent ES down by 3.6% over the next 4 sessions.Someone important decided that it wasn’t a good time for the SMA200 backtest, CL and RB recovered, VIX retreated from its very brief white channel breakout……and stocks recovered to new highs.UPDATE:  1:00 PM

We discussed yesterday how a breakout in USDJPY could help put the brakes on an equity decline. Today, that breakout continues.There is TL resistance at 112.14ish, but a failure to reverse there could see it zoom up to our next upside target at 114.60ish.  If it does reverse at 112.14, then it still stands a decent chance of backtesting the SMA200 at 109.29 in mid-October.

This dollar strength is compounded by the EURUSD, which tagged our next downside target at 1.1595 earlier today. If it doesn’t reverse here, it could meander lower to 1.1485ish to backtest the purple channel top and horizontal support.Put this all together, and we get a nice breakout for DXY.  It reduces the potential for the rising white channel to act as a continuation pattern such as a flag pattern and emphasizes, instead, the double bottom.The dollar strength hasn’t been terribly constructive for gold and silver, which are both continuing their breakdowns. And, it moves BTC that much closer to a breakdown. Time to tighten up those stops.A Stock Worth Watching

I like Dollar Tree as a company. Cheap staples for folks without a lot of money. It’s a good business, especially when many folks are still not doing well.

It was also one of my favorite shorts this past April when it had doubled from its pandemic lows and tagged a TL off its two previous highs.

The chart was crystal clear and insanely negative…

1. reversed from a triple top
2. dropped through all the important moving averages
3. gapped down below its SMA200
4. backtested the SMA200 while completing a H&S pattern
5. completed the pattern and gapped down below the neckline
6. almost reached the .618 Fib retracementIs it any wonder they just announced a big increase to their stock repurchase plan? The stock is up over 16% on the day, but faces enormously important resistance at 103-104 between the falling red TL and the SMA200.

If it doesn’t push through, watch out for a very ugly reaction.