It seems like I bitch about VIX nearly every day.  Once a good indicator of fear in the stock market, VIX is now used as a tool to stop declines dead in their tracks and boost stocks to new highs.

Picture a 23-year old MIT grad in a windowless room on, say, Dearborn Street in Chicago, with a big red button like the one to the left in front of him and a single monitor displaying SPX.

Whenever stocks come close to a 1% decline or threaten to make a lower low, an alarm goes off.  The kid starts mashing the button for all it’s worth, shorting VIX until SPX reverses — which it does, nearly every time.  For those who care about such anachronisms as market integrity, it’s terribly vexing.

Anyone who watches the “markets” closely every day knows the scenario all too well.  It has produced countless V-shaped recoveries and a steady string of new highs.  As of yesterday, it had been 82 days so far since a 1% loss in SPX.  The last time this happened was in 2006, when the streak reached 94 days.  Before that, it was in 1995 that it reached 105 days.

All together, there have been only 22 instances in the 17,000 trading days since 1950 (when the S&P 500 index was created) where SPX went 105 or more days without a 1% drop.  A quick glance at the chart below from the Statistical Ideas blog shows the same info in graphic form, and illustrates how negative days have become increasingly rare over the past few years.  Of course, it was during this time period that central banks became more actively involved in propping up markets.

Yesterday was one of those days that had loads of potential to break the streak.  Crude oil, another driver of bullish algos, had shed over 5% in the past two days and was being buffeted by the second worst inventory data in history.  Another favorite of the market manipulators, USDJPY, was capping off a nearly two-month decline.

Economic data has been weak lately: everything from consumer credit to construction spending.  And, the president so many expected to be lowering taxes and goosing spending by now has shown more interest in tweeting than in fixing the country’s problems.

It was no surprise that VIX started the day by breaking out of the falling channel it’s been in since the election.  But, as I noted in the daily post, it was the 6th such time VIX had broken out in the morning.  Each previous time, the breakout failed and stocks closed higher on the day.  Would this time be any different?

VIX started the session off with a 4.4% spike off the previous day’s close, which correlated nicely with SPX’s gap lower and subsequent 7-pt drop.  And, the EIA’s crude inventory report was coming up shortly.

At 9:52 AM, the VIX kid must have decided enough was enough.  Within the next hour, VIX was slammed back down to its previous close.  I didn’t think too much of it at first, as it’s not unusual to get a rally leading up to 10AM.

But, when the crude inventory data came out at 10:30 AM and CL and SPX both started selling off, VIX gapped down sharply.  The rest was textbook VIX manipulation.  Note that VIX had established a trend line, shown below in as the dashed purple line, that was swiftly broken.

VIX bounced just above the previous low (the asterisk below), which meant there was a chance that SPX  — which had rallied 9 points by then — might run out of steam.  We’ll walk through the remaining turning points, signified by letters in the charts below.

a.  SPX did sell off as VIX bounced.  SPX even broke down below trend line shown in red.

b.  As SPX broke down, VIX suddenly plunged to new lows, sending SPX back above the broken TL.

c.  VIX bounced up to its SMA10 — its second backtest — allowing SPX to decline to a marginally higher low.

d.  VIX tumbles sharply — another lower low to prevent SPX’s purple TL from breaking down.

e.  Another near breakdown of the purple TL…VIX responds with even lower lows.

f.  New lows for VIX, now off 5.2% since its earlier highs, allows SPX to break out above the neckline of an Inverted Head & Shoulders Pattern.  It’s now gained 9 points and is firmly back in the green for the day.

g.   Someone decides they don’t want SPX closing above the neckline (dashed, purple line), and VIX bounces until SPX falls back to SMA5 200 support.

h.  The usual VIX end-of-session sell off sends SPX back above the neckline.

i.   VIX’s little spurt at the close ensures that SPX finishes precisely on the neckline — leaving both bulls and bears scratching their heads re overnight positioning.

There were other things going on during the session, of course.  Despite the ugly inventory data (second biggest build in history, remember) CL was shoehorned higher — finishing with a slight gain on the day.  And, USDJPY continued its pattern of threatening to break out of the falling channel it’s been in for several months.  I count eight distinct tags of the channel top on the 5-min chart — each of them when SPX needed a helping hand, of course.

Rest assured, when CL finally does start plummeting, USDJPY will be spiking higher to try and compensate.  The yen carry trade has been dormant, but is far from dead.

Now on to this morning’s charts, which hint at somewhat more exciting days ahead.

continued for members…

ES finally reached its red .886 after hours, which means that both it and SPX have now completed Bat Patterns.

ES’ rally to 2295.25 was made possible by an overnight dip by VIX, which hints at a breakdown of the rising red channel.

CL, meanwhile, has poked through overhead resistance, suggesting a breakout.

Together, the suggestion is that SPX will come close to new highs, or will die trying.

Last, don’t look now, but DB just broke trend after reaching our 20.43 target and seeing the red channel break down.  If the SMA50 doesn’t hold, the next support is the SMA100 way down at 16.37 and the SMA200 at 15.82 — a 14-18% drop.

Stay tuned.

UPDATE:  9:35 AM

Almost there…

…thanks to VIX.

UPDATE:  9:41 AM

SPX just popped through, thanks to new lows from VIX and CL’s stubbornness.  For anyone not already short, this might be a good opportunity.  Keep your stops tight, as the IH&S target is 2303ish.

VIX has reached the yellow channel bottom again.  Dips below it are usually reserved for rescue operations.

SPX has made a higher high, which might satisfy the stop runners.

CL must come back to earth at some point.  This breakout is just, plain silly.

And, USDJPY is nursing a reversal along.

UPDATE:  10:01 AM

CL has reversed back below resistance, but USDJPY is spiking higher and VIX is diving below the yellow channel line.  SPX will probably succumb and rise to new all-time highs above 2300.99.  I’m hoping that sanity will prevail, but it’s looking dicey.  Keep your stops where you’re comfortable.

UPDATE:  10:27 AM

SPX has reached its IH&S target and ES finally joined it in poking through to new all-time highs.  USDJPY has pushed above its SMA10, but CL has retreated below its breakout point of overhead resistance.  I suspect TPTB will be satisfied in having established new highs and will call it a day here.

If USDJPY can maintain its breakout, and especially now that SPX and ES have established new highs (busting the downward facing harmonic patterns yet again) then CL should be able to establish lower lows.

FWIW, SCO has closed the gap we discussed yesterday and has tested a jumble of moving averages including its SMA10 and SMA20.   Trump just had a hug fest with airline CEOs, promising them the moon.  There are three things which vex airline CEOs: equipment, labor costs and fuel costs.

Is it a coincidence that the Energy Department just announced another 10MM barrel release from the Strategic Petroleum Reserve?  I’m not a big fan of holding leveraged ETFs, but I’ll be shocked if CL isn’t off by at least 10% in the next week.

UPDATE:  1:05 PM

SPX’s SMA5 10/20 cross just occurred which, on a meltup day like this, often indicates they’ll try to get SPX back above the SMA5 20.  I’d expect VIX to make another lower low any second.  In other words, if you’re still waiting for a retracement of some sort, it’s probably not coming just yet.  If you haven’t been stopped out yet, this is probably a good time to cut your losses.  You can always re-short if it fails to break out and SPX drops through the SMA10 again.

UPDATE:  1:38 PM

Seems like VIX has finally run out of room, and SPX should break down here.  Back to short for traders, but don’t be surprised if it catches support on the approaching SMA5 50.  The initial target is 2303.15 at the closing bell — the red TL and white 1.272.  If VIX breaks down here instead of bouncing, then we’re likely going higher still.  So, tight stops are a very good idea.

UPDATE:  1:47 PM

You’ll never guess what happened…  VIX is breaking down, so back to cash for SPX.  VIX is now off 4.7% on the day, and 7.7% since yesterday’s highs.

UPDATE:  2:38 PM

There’s the 1.272.  I’d take a chance at shorting here with tight stops and a target of 2303 as before.  Note that VIX is nearing the midline of the falling white channel.

And, ES has reached the .236 line of the channel dating back to 2009.  That doesn’t mean it can’t break out, but there should be some recognition.The usual caveats about holding short overnight apply.