Search

Everybody Has A Plan Until They Get Punched In The Mouth - Morning Market Squeeze

Key Tactical Takeaways:

> While Treasuries are receiving a strong risk-off bid this morning, it's not strong enough to push the 10-Yr futures contract above its bearish NT Trend Stop. Therefore, the 10-Yr yield will remain on course for higher highs into early 2021 as long as 0.88% holds on a closing basis.


> After completing 5 waves down from early November to our 161.8% extension target last Thursday, the $ is surging this morning. Pending a close > 90.82, however, this bounce will not have near-term staying power.

> After coming within 0.08 points of our 33.75 extension target on Friday, USO is holding the near-term bull stop at 31.31 this morning.


> S&P 500 futures are under pressure from strong risk-off flows this morning, but still holding the key NT Trend Stop at 3608.


> With the VIX FIRMLY above its near-term trailing stop of 25.2 this morning, the potential for volatility to increase over a multi-day period is now the greatest it's been since 10/26.


Some Quick Thoughts:

It's like the great Mike Tyson once said, "Everybody has a plan until they get punched in the mouth." While seeing the VIX up 45% before the morning cup of coffee was enough of a stimulant to supplement that first cup of joe, it certainly wasn't a surprise, given that we’ve been warning of the certain "dark winter" that was still to come in the form of spiking Covid cases, mutating strains, mass lockdowns since mid-November. Therefore, watching the media stubble all over itself this morning to stoke the panic coals once again is quite amusing.


One thing that novice traders have yet to learn is that it is rarely one event that sends markets tumbling. Instead, meaningful corrections usually have their foundations built on a number of underlying issues. While the "story de jure" has to do with the exodus from London in the wake of renewed lockdowns over the Christmas break in response to a far more contagious Covid-19 strain being spread, a combination of factors are actually being digested by the market this morning. Specifically, in addition to concerns over the new Covid strain, the $900B relief bill congress is poised to vote on falls short on main street support and is loaded with pork, while it is feared the democrats can still take the Georgia runoff in 2 weeks, making it easier for higher tax plans to be passed. Of course, the final kicker is today's massive, forced rebalancing of S&P 500 shares to adjust for the inclusion of TSLA.

For the past 2-3 weeks we've been warning of the growing vulnerability to a disruptive event such as this by sharing the VIX divergence and frothy sentiment readings highlighted on page 8. With the VIX FIRMLY above its near-term trailing stop of 25.2 this morning, the potential for volatility to increase over a multi-day period is now the greatest it's been since 10/26. Should volatility in fact continue to rise, the VIX has upside POTENTIAL to between 34.4 and 43.0. Not surprisingly, after completing a 5-wave decline from 11/02 late last week, the dollar is a safe-haven this morning. For this $ bounce to have near-term staying power, however, a close > 92.23 is required.


The DAX is off its lows, but below its bullish near-term stop at 13299, while the Nikkei sustained little damage overnight. For the S&P 500 (SPX), the focus is squarely on 3634. As long as this level holds, core long positions correlated to the S&P 500 can be held. Should SPX close < this level, however, a tactical topping process will start.


This is an abridged version of our premium content. If you'd like to have content like this sent to your inbox each morning, please click here to sign up for a risk-free, 2-week trial (no credit card required).


Please follow us on Twitter @xtractanalytics