The Red Zone

The past two weeks in the market have been a lot like the Superbowl game: not much excitement as things crept toward a seemingly inevitable conclusion. Now that SPX has reached the red zone, are the bulls about to score?

ES came within .54 of our primary upside target this morning……meaning that SPX is quite likely to tag our favorite upside target of 2732.47 at or near the open.VIX has cooperated, dipping below the SMA200 to tag both our targets: the yellow channel bottom yesterday and the gray channel bottom overnight. If the bears can get a turnover, this should be an excellent entry point for vol.continued for members…Recall that 2732.47 is the middle point of an A=C move down to 2138.04 — the 1.618 extension of the drop from 1576 in 2007 to 666 in 2009.

SPX has spent the past year oscillating around the 2.24 extension of the same grid, so a retreat to the next lower major Fib level would be perfectly in order. The idealized timing would be around the March FOMC meeting.This is the ES version of the same general outcome. The biggest difference is in the timing (and, ES’ SMA200 which is currently at 2743.44.) On this chart, May looks much more likely than March. The Dow shows a similar outcome, but with an April target. So, who knows?As the chart below shows, we have reason to believe we’ll see a significant bounce in VIX. But, it will all depend on the red channel bottom holding at around 15.36.There are numerous problems with this scenario.

First, SPX’s SMA200 is just above at 2741.55. It seems unlikely that SPX would come all this way just to whiff at such an important target.

Second, SPX has obviously pushed back above major support at the 2.24 and the H&S neckline.

Last, if VIX spikes higher, won’t USDJPY or CL/RB just come to the rescue?

UPDATE: 9:36 AM

SPX just pushed up slightly past 2732.47. If the model holds any water at all, we should see a reversal begin somewhere between here and 2741.55.Back to the questions above…

The SMA200 issue bothers me. But, all it would really mean is that the A=C target would move up to 2147.12. In other words, a very slight overshoot of the target would reach the 1.618 Fib. The other possibility is that SPX reverses just below the SMA200.

But, there have been no instances of that occurring since Jan 2003 (where SPX was rising toward an apparent tag, came close, but couldn’t complete the tag.) So, this seems less likely.

The pattern busting that has been going on the past couple of weeks is potentially more problematic. The 2.24 is less a problem when you consider that SPX has pushed back above it multiple times – including just before December’s plunge to 2346.

The H&S neckline is somewhat more troubling. But, again, we’ve seen instances where a temporary push above the neckline on a completed H&S pattern didn’t save the market from a downturn. The most notable recent example was on Oct 31, when SPX popped back above the necklines of several smaller H&S patterns.The real puzzler is that ability of USDJPY and/or CL/RB to redirect the algos to push higher.

USDJPY is due another drop if the DXY dip is ever to occur. Remember, it put in a lower low last month, and this after a backtest following a major channel breakdown. In other words, it should be going lower. But, will central banks allow it to?

I can’t see any economic reason why they would. But, we’ll come back to that.

The story is the same for oil and gas. They have been gradually gaining ground since reaching our downside targets on Dec 24. And, there’s no great urgency that they reverse here. There’s plenty of headroom for additional gains without inflation raining on Trump’s low interest rate parade.

Naturally, upcoming inventory data could get the downside party started. But, there’s no strong economic reason for things to reverse at this, a critical inflection point for the bulls. In fact, the supposition would be that TPTB are saving up a bunch of algo-igniting announcements and economic data, etc. that would guarantee a leapfrog over SPX’s SMA200…if that’s what they want.

The cynic in me still wonders if TPTB haven’t mapped out a scenario where they could dump Trump during this lull between the 2018 and 2020 elections. Pence would be much more manageable and, obviously, less polarizing — an issue now that Trump’s numbers are slipping and the Mueller probe seems to be coming to a head.

The Dems, on the other hand, would probably prefer to keep Trump in office and extend the investigation until October 2020 at which point something devastating is revealed. But, a serious slide in the market right now would certainly work against Trump and, thus, be acceptable to them as well.

This is obviously conspiracy theory gobblygook. But, it’s worth considering, especially if we see stocks reverse here and the algos don’t come to the rescue. If VIX starts tanking, i.e. the red channel breaks down, then we’re likely to get the SPX SMA200 tag — at which point the real test gets under way.

Not taking sides or talking personal politics — just exploring potential paths.

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Now, let’s take a quick look at the bond market. Both the 10Y and the 2Y are getting a little bump here.It will further delay TNX’s drop to 24.98 and, potentially 21.72. This suits the ZN chart just fine, as the optimal dates for the 123’100 to 123’285 tag would be between 2/6-2/14. We’ve relied heavily on our yield curve model, which at this point is threatening a breakout of the dashed red TL. The longer the trend, the more a breakout matters. And, this one has been in place since last January. The smallest downturn pursuant to a TL breakout was in April-May 2018, which yielded at 124-point decline.