VIX Shows Its Upside Elasticity, 10s Face Critical Test - Morning Market Squeeze

Key Tactical Takeaways:

>  Given the higher slope of its 200-day moving average, the VIX's ability to find steady upside follow-through this week opens the door to a high percentile overshoot that targets ..., at a minimum. This goes uncontested against ....

> After the S&P 500's near-term bull trend officially broke down with Monday's close < the ... stop, pre-market futures are indicating that the high-end of the initial target zone (... - ...) will be tested against a trailing stop of 3444.

> Oil's impending test of its Sep/Oct lows is just one example of the many pieces of the reflation puzzle that have entered deep corrections in recent days. ... on the 10-Yr yield must hold (on close) to case for immediately higher rates intact.

> The DAX is collapsing this morning, down 3.45%. This should take our EWG short closer to its first big target of .... Though such a move would warrant profit taking on our short position. we're going to let profit run. Also letting UVXY run.

Some Quick Thoughts:

A few weeks ago, we recommended keeping a close eye on the relationship between inflation expectations and US equities, not only because of how strong the correlation had become but also because of how mature the 5-Yr, 5-Yr Forward Rate's wave structure looked.  Now, with the 5-Yr, 5-Yr Rate turning lower rather aggressively in recent days, a wrench has been thrown into the reflationary part of the narrative for both equity and long-end Treasury traders in recent days.

With the election just days away, the anticipated rotation to higher volatility is really picking up steam, with the VIX jumping to a test the spike levels of 09/04 this morning. This follow-through action by the VIX should be a concern to equity traders that are trying to pick a bottom, because it coincides with a now higher sloping 200-DMA. Essentially, this increases the upside elasticity because the 200-DMA's upward slope confirms that the long-term energy/trend is leaning higher. Backtest results show that under such conditions, extensions of roughly 5 x the ATR (Average True Range) from the 50-day moving average are quite common, which would suggest that an eventual VIX spike to the 44 area in the days ahead would come as no surprise.

For a good portion of the post-10/12 equity correction, the Treasury market did not act as the usual safe-haven destination. Well, this has change in recent days as inflationary pressures ebb. The recent safety bid now has benchmark rates testing ..., which is a level that must hold to keep the most direct route to higher rates intact. Should 10s close below this level, it would set the stage for an immensely important test of ..., which is the zone that ultimately must hold to prevent a squeeze of the long-end's massive short base could be ignited. 

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