SPX has made a new low and is challenging the Lip of the Cup with Handle formation. We may see the SPX reach 3400.00 in the next week or so whether it closes above or beneath the trendline at 3610.00.
ZeroHedge relates, “After a Midsummer Night’s Dream in July, US stocks are convulsing all over again.
With speaker after Fed speaker hammering home the message of higher rates, the reality of higher discount rates is weighing on sentiment. The Fed’s dot plot shows us that a pause from rate hikes may not come before the benchmark reaches 4.6%, but of course that’s not a guarantee. But is it all really down to just the Fed pushing rates higher?
All that rate volatility stemming from the UK can have a bigger domino effect on assets as pension fund managers — stung by the fiasco of policymakers unveiling fiscal stimulus at a time when inflation is already running rife and wrecking their P&L — turning uber cautious with the other assets in their portfolio. Front and intermediate bond yields in the UK — which don’t enjoy the Bank of England’s backstop in its current emergency operations — are still climbing higher.
Meanwhile, Prime Minister Liz Truss and Chancellor Kwasi Kwarteng will reportedly hold emergency talks with the head of the Office of Budget Responsibility before being presented with a first draft of full forecasts from the fiscal watchdog next week. Still, it may make serve well to calibrate the sense of optimism that we have seen overnight in the pound.
Amid all this, the Fed must be hoping that all this tumult doesn’t impinge on US financial markets. However, it’s perhaps not entirely a coincidence that US investors are parking record amounts of cash with the Fed. Panic seems to be in the air.”
The following article prompted me to bring up my monthly NDX chart which explains the hesitancy of the NDX to probe new lows until yesterday, when it matched the June 16 low. Most analysts use moving averages divisible by 10, thus the 20, 50, 100-day moving averages. The Cycles are similar, but divisible by 4.3. This morning we see the NDX now beneath the 43 month moving average at 11512.00. This support is now broken and the next support is the 86-day Moving Average at 8605.10. Since the Cup with Handle formation target is 6821.00, this support may also be broken.
In the overnight markets, NDX futures rose to 11292.10, but then fell back. It is currently near 11200.00.
In today’s op-ex, Max Pain is at 11310.00. There appear to be no significant call contracts (long gamma), while short gamma begins at 11200.00. with clusters of puts every 50 points beneath that.
ZeroHedge comments, “The Nasdaq’s near-16% plunge since the middle of August has brought two critical thresholds back in focus. One of them is the June low that remains unbroken for now and the other is support from the 200-week moving average that successfully held a test by the last leg down.
The bellwether technology gauge has had a roller coaster third quarter — underlined by extreme volatility under the surface. The trough in June saw the index rally over 22% on investor expectations that the growing risk of a recession would force the Fed to pivot down from its aggressive tightening stance. Those gains were merely fleeting though, as a surging dollar along with rapidly rising rates globally saw investors quickly reassess those earlier bets, resulting in the gauge reversing its largest intra-quarter gains in history.
The index is now resting at the 200-week moving average which has provided support on several occasions historically, including the pandemic crash of 2020. Breadth wise, the percentage of members trading above the 200-day average was at 8% at Tuesday’s close, matching readings witnessed during the 2018, 2020 and the June 2022 lows.”
The SPX also closed beneath its 43-month moving Average at 3649.00. SPX futures rose to 3680.50 in the overnight session, but has eased back down to the 43-month support. A breakdown here suggests that the Lip of the Cup with Handle formation at 3610.00 may not deter the decline. The weekly Cycle Bottom may come into play as the next support.
In today’s op-ex, Max Pain is at 3755.00 while long gamma may start at 3775.00. Short gamma may begin at 3750.00. While the expiring options are not heavily populated, they may cause difficulty for the dealers and hedge funds.
ZeroHedge reports, “If yesterday markets made little sense, when the dollar and yields slumped yet stocks and other risk assets tumbled alongside them in a puzzling reversal of traditional risk relationships (a move which was likely precipitated by the plunge in AAPL and KMX), today things are a bit more logical with the dollar initially extending its slide helping futures rise to session highs just below 3,700, before the dollar surged just after 5am as sterling tumbled after Bloomberg reported that Prime Minister Liz Truss’s government signaled it was sticking with its plan for tax cuts after a meeting with the UK’s fiscal watchdog, dashing market expectations that a policy U-turn might be imminent which has pushed cable briefly above 1.12 overnight, wiping out a week’s worth of losses. As a result, after rising as much as 0.8%, S&P futures were flat, up just 0.1%, the same as Nasdaq futures. Government bonds rallied across Europe and the US, as the dollar strengthened after reversing its earlier loss.”
VIX futures declined to 30.86 in the overnight session. They have recovered somewhat, but not yet positive. The next test for the VIX appears to be the Head & Shoulders neckline at 40.00.
Next Wednesday’s Max Pain is at 30.00, with long gamma above it, possibly as far as 80.00.
TNX resumed its decline in a short-term correction, but t may not last. Today begins another period of strength for TNX that may last through the first week of October. The Cycles Model implies a continued rally in TNX until mid-November.
USD futues bounced from the Cycle Top to an overnight high of 112.66 in a consolidation. The Cycles Model indicates that the correction to the 50-day Moving Average may still be underway, with the next Master Cycle (low) coming in mid-October. This may track investor money coming out of stocks and going into money markets.
BKX closed beneath its massive Head & Shoulders neckline at 97.00 yesterday. This is very important. Should it decline beneath its Master Cycle low at 95.18, we may see a phase-shift (waterfall decline) in the banking index, prolonging the decline through the end of October or mid-November. Normally we might see a three-week rally, which is the alternate view.
ZeroHedge observes, “Yesterday, around the time all hell broke loose after the BOE bailed out the UK gilt market and prevented a Lehman moment that would have wiped out billions in UK pensions, we reported that the all important FRA-OIS indicator of interbank funding stress (and money-market risk), and general market liquidity – or lack thereof – was soaring and at last check was above 37bps, having exploded off ‘no stress’ levels just two weeks ago.
And while FRA-OIS barely moved today – stuck at ominously wide levels – another market stress/illiquidity indicator has started flashing red. As Bloomberg’s Edward Bolingbroke, who first spotted it, writes today “anyone doubting that liquidity is draining from the world financial system just has to look at the daily swings in interest-rate swaps.”
The Cycles Model calls for another two weeks of decline in the Ag Index, but I would suggest investors start accumulating (DBA) shares here. The reason for the decline is decreasing liquidity, as reported above. However, the reports on the 2022 harvest may start coming in, propelling the Ag Index to new all-time highs. In the meantime, do your Thanksgiving food shopping early, as the following article informs us.
ZeroHedge reports, “If you love to cook, this upcoming Thanksgiving may be a real challenge for you. Thanks to a resurgence of the bird flu, supplies of turkey are getting tighter and tighter. Sadly, the same thing is true for eggs. And as you will see below, reduced milk production is sending the price of butter into the stratosphere. Thanks to soaring prices, a traditional Thanksgiving dinner will be out of reach for millions of American families this year, and that is extremely unfortunate. Of course all of this is happening in the context of a horrific global food crisis that is getting worse with each passing day. Yes, things are bad now, but they will be significantly worse this time next year.”
Note: I will be out most of the day, so good investing and rest up this weekend.