SPX Walks Ledge After Squeeze Fuel Evaporates-Morning Market Squeeze

Key Tactical Takeaways:

> After finding support in this area on Monday, SPY is now faced with a critical test of bullish near-term support at .... Failure to close above this level would signal the official start of a volatile pre-election period.

> In recent months AUDJPY (currently 74.266) has become THE forex risk barometer to watch. With this in mind, recent deterioration in AUDJPY is a concern. Essentially, ... must hold to prevent an intermarket sell signal for US equities. 

> After the VIX closed > the bearish short-term trailing stop at 27.8 on Monday, all eyes must be on the far more critical near-term stop at ....

Some Quick Thoughts:

You'll recall that during the 2nd half of the post-09/24 equity market rebound, we bemoaned the fact that, rather than genuine investor interest in wanting to buy stocks at these levels, the rally was largely the result of shorts being squeezed by the stimulus carrot that was being dangled in front of the market at the time. This was confirmed on Friday, when the CFTC's Commitments of Traders report revealed data showing net short NDX mini futures positions from 3 weeks ago (the shortest since Aug '06) being reversed at an incredibly fast clip. With this source of bullish fuel now used up, the market has been allowed to correct down to the still rising 50-day moving average in recent days.   


In addition to the NDX-related data discussed above, Friday's COT report also revealed that large speculators are at their most short in VIX futures since January, around some of the shortest levels in history. As we began highlighting on the Event-Driven Stats page of this report earlier this month, the VIX shows a very strong tendency to trend higher during the weeks between the first presidential debate and the election. The VIX has held firmly above the 25 area since the 09/29 debate, and on Monday closed above its bearish short-term trailing stop at 27.80. Similar to the last time the VIX surpassed its short-term stop on 10/06, though, the real level to pay attention to is the near-term stop at ..., as a close above here would signal that a sustainable increase in volatility has begun.

Bottom line: with the fuel source for the post-09/24 rally now used up, retail traders who still have very little experience weathering adverse conditions are being put to the test. If the likely outcome of there being no stimulus deal by Speaker Pelosi's Tuesday deadline comes to fruition, we see the S&P cash market's ... level as being the point below which selling can accelerate. In the event of a close below this level, ...would begin.  

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