It was a nice short and bounce — 288 points (+9.8%) in three weeks — but it leaves us in that familiar and not so comfortable place of wondering whether there might be more.

While there are plenty of hints, the answer today should come from VIX — which will either bounce or break down below the purple trend line. Since I didn’t win the Mega Millions jackpot, I’ll have to contemplate whether RB and CL, which both tagged our next downside targets yesterday, have more in store.

Both have broken down below multi-year trend lines and will clearly play a role in October inflation data and, thus, what to expect from the embattled Fed.

This is about to get really interesting.

continued for members…

ES is on the cusp of either a breakout to its SMA200 or a breakdown.  If VIX breaks down, look for a pop up to test the SMA200 and white channel top at 2769

After being off 25 points overnight, it got back to almost even before selling off again in the past hour.SPX is in a similar position, a TL and the SMA200 both at 2768ish. Note that it closed yesterday’s gap should it decide enough is enough. And, as we discussed yesterday, it failed to retake the yellow channel midline – a bearish sign and reason for my bearish cold feet just before the close.

A reminder re our favored downside targets should 2703 fail to hold.And, the bigger picture for VIX – no shortage of upside targets if it doesn’t break down.While USDJPY has declined to make much of a move yet……EURUSD finally broke down…

…which gave DXY permission to break higher as we discussed yesterday.  Remember, a higher DXY isn’t always positive for stocks.  It mostly boils down to whether it occurs in conjunction with a rising USDJPY.  And, so far, we’re not seeing that.USDJPY failed to break above horizontal resistance when it backtested the rising white channel from which it broke down back in Jan.  A drop down to the SMA200 or lower could do some damage.Also a threat, CL and RB.  CL has broken down from the purple channel bottom and SMA200, which it is currently backtesting.  A failure to retake 67.63 would trouble the algos. RB is in a similar situation, having broken down below the rising white channel bottom and the falling yellow channel bottom, and is well below its SMA200. If you all don’t mind, I’d like to slip on my tin foil hat for a minute.  We’ve talked about this before, but I keep wondering about the Trump-Fed dynamics.

By now, Powell is probably getting pretty annoyed at the criticism levied at the FOMC by The Donald.  It’s entirely possible that Trump understands and agrees with the Fed’s mission to stave off inflation and build in enough cushion in interest rates so that they have viable options (i.e. more QE) in response to the next financial crisis.

The counter-argument is that he isn’t getting what he wants and is therefore simply pissed off.  Ever met a real estate developer who didn’t want lower interest rates?  Neither have I.

Under either scenario, Trump is complaining loudly about higher interest rates in order to score political points with voters and to shift the blame to the Fed for any fallout — such as a market correction.

What can he do, other than tweet his displeasure?  Here, we get into areas with which I’m not too familiar.  In the past, the Fed and the Treasury have typically worked hand in hand.  But, what would happen if Trump order Mnuchin to do what he could to bring down inflation and interest rates?

I’m pretty sure that, considering the hot water Saudi Arabia is currently in, Trump has some leverage regarding oil prices.  And, the White House presumably controls the BLS, which publishes inflation data, and EIA, which reports crude and gas inventories and prices.

The Fed, on the other hand, has more direct control of markets.  While supposedly not directly controlling equity prices, they have long been suspected (not just by me) of manipulating those things which affect equities (e.g. oil, gas, VIX, currencies, interest rates, etc.)

I imagine that Powell et al are plenty nervous about Trump increasingly combative tone.  If Republicans held the House and Senate, might he take a shot at legislation that would diminish their autonomy?  Might he try or at least threaten to fire Powell?  Not much of a stretch, IMO.

So — and again this is total crazy talk/conjecture on my part —  might the Fed fail to step in and rescue the market this time around?  Sure, Trump could blame it on them, but a plunge of another couple hundred points would worry folks and potentially tip the balance in some tight races where candidates are aligned with Trump.

Just a thought.  But, judging from the fact that VIX didn’t do the very simple and common thing of breaking down below that little red TL, I think it has merit.

I haven’t posted it in a few days, but remember COMP never made it back into the broken red channel and is currently sitting below its SMA200.  Its nearest serious support is well below current levels.

UPDATE:  10:22 AM

Time to put up or shut up, bears.  Should know in the next few minutes, but VIX is suggesting lower.  Note that in addition to the red TL, ES is testing its 2.24 extension.

UPDATE:  10:33 AM

The weekly EIA inventory report just came out.  We got a 6.3MM build in crude and a 4.8MM draw in gas.

Got a little bump from RB and CL that seems to be fading fast. UPDATE:  1:18 PM

ES just reached its .886.   We could see a bounce here.  But, the next step is the important one.  CL is back below its SMA200, VIX is still bouncing, and USDJPY is sitting on its hands.  It’s possible that SPX is simply going for a more perfect tag of 2688.63, but I doubt it.  It appears we’re going lower. If ES were meant to bounce here, we should see CL back above its SMA200 and spiking higher.

USDJPY is out to lunch.UPDATE:  2:42 PM

VIX backed off a little, even broke slightly below an intraday TL.  Doubtful that it’s enough, as RB is still heading south, CL is still below its SMA200 and clinging to its SMA5 200, and neither SPX nor ES has broken out of their falling wedges.  This could be the last bounce of the day unless the algo bait gets its act together.

UPDATE:  3:37 PM

This is a potential bounce spot here at ES 1.272 and the top of VIX’s yellow channel.  But, COMP is till in the middle of nowhere and SPX has completed a nice little H&S. The H&S Pattern targeting 2479.24… …and, the bigger picture.Also, a reminder about COMP…  The 6700 target would be about 5.7% lower, which would equate to about 2500 in SPX if they moved in equal measure.  The 6227 target would equate to a 12.4% decline, or SPX 2326.

The former is fairly close to the Feb lows, while the latter is near the 1.618s (purple is 2314 and white is 2280.)  From there, it’s not terribly far to 2138 – now only 19.5% away.Last, a quick look at oil and gas. RB closed at its low for the day, below the purple .618 and almost to the red .786.  It’s worth noting that it’s a little over a penny until it enters the Oct 2017 price range.  This happened in Dec and Feb, when the overlaps amounted to 6.5 and 11 cents.

I point this out because both months were ones in which there was an apparent attempt to keep a lid on inflation.  If the same effort is being made now, a drop to 1.6969 or 1.622 would be in keeping with those prior events.  Note that the last gas price measurement of the month will occur on Monday the 29th.

The average thus far is 2.7985.  A measurement of, say, 2.60 on Monday would bring the month’s average to 2.7588 — still a 13.5% increase over Oct 2017 and typical of 2.2% annual CPI increases.

If Trump is trying to make a dent in official Oct gas prices, we’d need to see more of a crash.  To get the YoY increase down to 10% would take a crash to 2.17 in the next few days — about -21% and not really feasible.  This is why we’ll probably see heavy manipulation in the CPI data.The bigger problem from Trump’s standpoint, if this is his game, is that CPI won’t be reported until Nov 14, 8 days after the Nov 6 election and 6 days after the next Fed meeting (Nov 7-8.)  So, even if CPI were aiming at 2.0%, the news would come to late to help Trump.

For now, I’ll just call it a 1.70 by Oct 29, with additional support at 1.62 and 1.37.  Of course, any further drop will do more damage to stocks — not an appealing outcome, either.

Re CL, there’s purple channel midline and .500 Fib support at 59.47 if the horizontal red channel breaks down.

One last chart…VIX nailed our next upside target.  So, as much as I’d like to, we can’t rule out a big bounce tomorrow morning.

 

Fin