It’s not usually so obvious. The reality is that the guys who usually push the buttons and pull the levers behind the curtain are all off on vacation.
The ones left behind lack the deft touch that’s required to manipulate the stock market without it being quite so obvious.
For you doubters, here it is in very simple terms. We all heard about Mnuchin assembling the Plunge Protection Team as the S&P500 nuzzled up to bear market territory. It actually closed down 20.05% from its intraday highs on Monday.
Then this happened yesterday, the very next session. It’s what the PPT does. It’s what they’ve always done. As usual, it worked. And, it had nothing to do with retail sales, presidential tweets or employment figures. Here’s how it works.
Only about 10% of all trading volume is conducted by fundamentally-oriented, discretionary managers. So everything else is either index, quasi-index, smart beta, trend following, risk parity, or some other quantitatively-oriented strategy.
The one thing they all share in common is that they all react to what’s happening in the market. If you can produce conditions that cause them to react, you can be the tail that wags the dog. And, it’s especially easy to do amidst a low-volume holiday week – a very common occurrence.
There are three primary factors which can readily cause stocks to rally: a decline in VIX, a rally in USDJPY, and a rally in oil prices. All of these factors were instrumental in getting SPX up to 2940. And, all were in the process of unraveling over the past several weeks.
Yesterday, they all recovered.
First, here’s what the S&P 500 e-minis (ES) looked like. Note the labeled reversal points.
The first factor was oil, which saw a channel which dates back to Feb 11, 2016 break down on Monday. It closed below the channel bottom – quite bearish.
Yesterday, it recovered sharply — rallying 10.95% from Monday’s lows. Note that it bottomed where ES did at “1”, pulled back a bit at “2” when ES backtested its SMA5 200 (a frequent support level for algorithms), and didn’t let up until it reached “3” at the same time as ES.
The second was VIX, which on Monday had closed above the .618 Fibonacci retracement of the drop from 50.3 in February to 10.17 in August. This was a potential turning point. So, the fact that it closed above the .618 on Monday was quite bearish.
Despite having closed above the .618 (point 1), it dipped below it and broke below the rising purple trend line at exactly the same time that ES first climbed above its SMA5 200. It backtested the TL when ES backtested its SMA5 200 (point 2) and plunged 18.3% over the next 6 hours — conveniently bottoming out (after breaking below the red TL as well) at the close (point 3.)
The last factor was USDJPY, which had closed below its SMA200 on Monday — again, bearish. 
Yesterday, it had worked its way below the .886 again prior to the market opening, then sharply recovered by the time the market closed. As with the others, its inflection points exactly matched those of ES.
The big question on everyone’s mind is whether the correction is over. Have we avoided a bear market? Our charts have shown that lower lows would come ideally in February or even March.
The fact that stocks were falling so sharply produced incongruities between Fib levels and channel bottoms that were going to be messy to resolve. This bounce, however long it lasts, might have taken care of that little problem. We’ll find out soon enough, as futures are currently off about 40 points and didn’t make it back into the rising channel from which they broke down last week.
I’m still on vacation, but will check in later in the session. A reminder for members and lurkers alike…our sale on Annual Memberships draws to a close in a few days. I suspect this will be the last time we offer them. But, regardless, the price is right — equal to about 5 months on the monthly subscription plan. For details and to sign up now, CLICK HERE.
GLTA.