One of the old adages that’s earned its keep over the years is that “markets take the stairs up and the elevator down.”  In other words, rallies come at a steady pace and corrections happen quickly, without notice.

That observation might have applied during the hundreds of years leading up to present day.  But, for backtests such as we’ve seen this past week…not so much.  ES completed its backtest of its January highs yesterday, tagging our initial target in a nearly incident-free landing.

Unfortunately for those who abhor excitement, the final 5 points weren’t quite as smooth.    But, the subsequent runway bounce got the index aloft again without incident.  The only problem: SPX didn’t backtest its January highs — which are the equivalent of about 2872.75 in ES, ideally around 12pm.

It’s quite likely we’re in for a little more turbulence.

continued for members…

CL and RB are still looking kinda hinky, though RB did officially backtest its purple channel top at 1.955.  The safe move is to be long but with tight stops in case the lower target 1.8939 plays out (which is my expectation.) It’s a 3% difference, so maybe not all that meaningful.  However, anything below the SMA200 could gather additional downside momentum.

Remember, EIA inventory is due out at 11:00am today due to the Labor Day holiday.  A bounce in CL/RB could help SPX bounce off its target. Likewise, if SPX stubbornly resists a backtest of 2982.87, CL/RB could help drive it a little lower.  So, while the charts suggest 12pm, 11am might be the better timing.

The USD is also looking a little weak. VIX still has a clear path to its SMA200.And, SPX is still looking for some closure – ideally between 11am-12pm.  Note that the SMA20 is just below at 2866.27 (which would put ES a few points below its SMA20 at 2869.30.) It’s quite possible we’ll get a slight overshoot.

As always, keep an eye on VIX (that SMA200) and USDJPY — which is looking kinda weak.The work on the website continues.  I’ll check back in later.

UPDATE:  10:51 AM

There’s the backtest for SPX.  VIX has slightly broken out, so SPX’s SMA20 at 2866 remains a possibility.  EIA inventory is due out in a few minutes. If If VIX doesn’t reverse here, it has potential up to 16.  But, I’d be comfortable taking profits on our long position (from Aug 23, 11.65: +29%) right here.UPDATE:  11:04 AM

Big draw in crude, build in gas and distillates.

CL and RB aren’t bouncing much, at least yet.  And, VIX is still pushing higher.  This gives SPX the go ahead for the SMA20 at 2866.27 (or ES 2869.30.)  Remember, yesterday ES’ support was enough to send both 16 points higher.

UPDATE:  11:14 AM

ES’ SMA20.If VIX backs off and CL/RB bounce, then this is the low.  If CL/RB continue sliding — as they currently are — and VIX continues climbing, then its SPX’s SMA20 we should expect to play out.

Note, also, that USDJPY has broken down.  It’s an equally good indicator of when TPTB are ready to stop the bleeding.

BTW, some of you have written in asking about our lower targets.  They’re absolutely a possibility.  But, as we discussed last week, they are unlikely unless the headlines get truly awful.  They are on the chart merely to show how bad things could get if SPX’s 2866/2872 support levels don’t hold.

One fairly reliable indicator is NKD.  It bottomed prematurely on Mar 23 and broke out without reason on May 11.  Since then, it’s backtested the falling white channel a couple of times, but stopped when SPX needed to push through its faux neckline.  Since then, all sideways.  And, it’s currently clinging to its SMA200.

If stocks are going to melt down in any meaningful way, NKD would be a great canary in the coal mine — with potential all the way down to 20815 – 7.2% below current levels and 10.2% from last week’s highs.