We’ve Seen This Movie Before

I’ve seen one particular assessment over and over in the financial news this morning: The market’s rebound following Iran’s missile strikes last night was “surprising.”

No, it is most certainly not surprising! Not even a little bit. Anyone who pays the least bit of attention to charts could have seen this coming a mile away. It’s the same response we’ve seen countless times over the past several years and is a product of the way the market works these days.

The chart below shows a red channel which S&P 500 futures have followed religiously since stocks broke out of a downturn when Phase One was falsely declared a done deal on Oct 11. Since then, ES has fallen substantially only when significant overhead resistance could be backtested [previously resistance, it would now provide support.]

Ever since ES first broke out of the rising purple channel on Dec 12, we have been waiting for a backtest of that channel. A backtest is the market’s way of saying it’s done with prices that are any lower.

Yesterday morning, I posted this chart – placing a downside target at the top of the rising purple channel around 3180. Only if the backtest didn’t hold would any of the lower targets come into play. VIX, which spent the past week being smacked back below its 200-day moving average, began to creep higher as soon as the cash market closed.  At exactly 7:41PM ET, it topped out and began a steady drop back to its former lows.

Why 7:41? Because that’s exactly when ES completed its backtest of the purple channel top.  There was no other news, no announcements, no tweets – just completion of the backtest.Yes, it could have waited until Monday when the purple channel top and falling white channel bottom intersected. But, that would have meant a more substantial intraday drop below the bottom of the rising red channel.

Remember, the rising red channel is the one that bulls are hell-bent on preserving – the path out of the rising purple channel which promised gains of only 1.4% annually.By now, readers know that when I say “bulls” I’m not really referring to fundamentally-oriented portfolio managers and analysts who suss through news and data and draw conclusions about the likely impact on markets. They are in the minority, now that quantitative and passive trading are responsible for 90% of all volume.

I just finished Gregory Zuckerman’s excellent treatise on quantitative investing: The Man Who Solved the Market: How Jim Simons Launched the Quant Revolution. It’s a great reminder that central bankers and their proxies have been enabled, incentivized and prompted to exert great control over stock prices.

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