VIX to the Rescue Yet Again

Head & Shoulders patterns are fairly reliable harbingers of downturns. The one which has been setting up on ES for the past couple of weeks promised a 100+ point plunge.It was just now busted by none other than VIX – the algos’ favorite signal – which caused ES’ right shoulder to marginally (by 1.50 points) exceed the head. With the pattern now officially busted, there’s no downside risk, right? If Congress’ failure to reach a stimulus compromise and foreclosure protection doesn’t matter, then sure. No more risk.

continued for members…

But, what if the whole goal was merely to bust the pattern, and support will subsequently be withdrawn? SPX and ES could be maintained in this tight little trading range for 3200-3300 for who knows how long.

I wouldn’t assume that economics don’t matter in this case. The key will be whether VIX can remain below its SMA10……and USDJPY continues bouncing……in order to keep NKD above its SMA200.USDJPY’s bounce, along the EURUSD’s reversal at the red channel top……has been a boon for the DXY. It certainly hasn’t been driven by the 10Y, which is faltering atop an important TL. Any way you look at it, the oil and gas bounce we’ve seen this morning qualifies as a backtest. The thing that should equity investors the most is the DXY. With TNX’s white channel having recently broken down, it invites comparisons to the channel formed between Sep 2019 and Jan 2020. It was the exact same slope.DXY managed to bounce to higher highs until TNX broke its horizontal support on 2/24/20 – at which point DXY plunged from its recent high of 99.87 yo 94.65. It was a plunge that broke support for DXY, significantly, marked the start of the Feb-Mar equity crash.

Although the 10Y fell off a cliff, the 2Y fell off a steeper cliff. …which caused a sharp bounce off support in 2s10s – which, according to our yield curve model, is always bearish for stocks.The confusing part of the puzzle right now is that the 10Y is dropping so very gradually and the 2s10s is declining (also bearish for stocks) so gradually that one has to wonder if the lack of a shock move will have the same effect on equities.