Powell’s virtual Jackson Hole testimony is coming up. But, the cat’s already out of the bag. The other Fed governors have spoken. Inflation is clearly more than transitory. It’s (past) time to start tapering the massive asset purchases.

continued for members…

There’s no question that those asset purchases have put the market where it is. So, it stands to reason that withdrawing them won’t exactly help stock prices.

But, there are other considerations.  Volatility has been hammered mercilessly since its Mar 2020 highs.And, the few bullish (bearish for stocks) 10/20 crosses we’ve seen have been hammered into submission with a series of lower highs and lower lows.

The algos have been well trained to respond with new highs generally linked to drops through trendlines, moving averages, new lows, etc. Though we’ve had a few instances where VIX broke out of the channel for a few hours, it has always dropped back down.

You have to wonder what would happen if the bottom of that falling channel were explore. It’s currently around 7.50, well below the previous low of 8.56 set in Nov 2017.Likewise, dollar weakness – which has generally been beneficial to stocks – is only a few keystrokes away. EURUSD “broke out” of its falling red channel that dates back to 2007 last November – helping to prevent a breakdown in SPX following its success in regaining its 2.618 Fib extension. EURUSD pushed well above the channel top, reaching 1.2336 at the end of the year – which corresponded with new all-time highs in SPX.It backtested the channel in April 2021, quickly rebounded to a lower high, and is in the process of backtesting it again after recently notching a lower low. But, it remains broken out and the falling wedge it has traced out offers another opportunity for a breakout.

Looking at it from DXY’s standpoint… DXY’s rising purple channel broke down when EURUSD broke out.Since then, it backtested the purple channel in Sep 2020 and has traced out a rising flag pattern that has the potential to backtest it again.

It has held support from May so far, but is very clearly testing that support.

Offsetting the dollar’s weakness against the euro has been its strength against the yen – a net positive for stocks.

USDJPY broke out of the falling purple channel from Dec 2016 in April (which enabled ES/SPX to break above their 3.618s) and again in May (a backtest and higher highs for stocks.)

The other factors we watch very closely because they play such an important role in the inflation picture are oil and gas. Both have bumped up against overhead resistance and, if the Fed is determined to bring inflation back down, are overdue for a decline. And, if they’re on their way down, look for interest rates to do the same.

Note that while ZN is off today… …it is holding channel support. If rates do, in fact, decline then GC has good upside potential. Otherwise, not so much – and the push back into the broken channel to backtest the SMA200 will fail.

more later…