A New WAG

This is the first iteration. I have not considered the time, only the form and potential price areas.

30-Year Bond Symmetry

Let's see if the dip comes or not. I closed out some TLT calls earlier in the week because it hit a horiztonal. TLT has more a dip that argues for a bullish turn immediately, whereas ZB would still need a dip to fully reflect the down move. It doesn't have to be a symmetric move though. The expected move is higher and any dip should be limited.

Inflation Inflation Inflation

The most interesting chart today is ZB and the reversal in treasuries. It has made it back to my initial target level at 121. Above and there's a potential base in place. I've been holding some calls since Monday that were a short-term trade with possibility. The big question going back to the summer for me has been: when/will bonds signal a shift to deflation? Home prices are down on schedule, but as I've discussed before, the government inflation indices may not capture this until as late as early 2023 if Larry Summers has it right.

Copper and oil have stabilized with the markets. These factor into the "big question" beccause inflation is hard to kill. The 1970s saw the Federal Reserve take their foot off the rate hikes when recession hit and the CPI reversed, but it never made it back down. Result: endemic inflation.

As for the market, I don't think we're in an uptrending market with earnings season volatility. I'm not convinced in a rally yet. My current thinking is the transition scenario where the economy moves from inflation to deflation, bonds rally and stock market bulls and maybe commodity bulls (less successfully) interpret this as bullish. Then around January, the reality of deflation sets in. Contra that, the Cleveland Fed has been hiking thier inflation forecast for October. Maybe this rally gets garrotted like it has the past couple of months.

Short Every Rip

The stock market has been grinding lower and keeps taking out important support areas. If you look at the 1 minute chart or similarly short timeframe, you can see multiple hits on the ES at 3700 and 3680. There is resistance at these levels as well. Which way will the market go?

This trendline is incredibly important for whatever reason.

There is heavy call buying after previous high put buying, pushing prices way up.

The long-bonds continue cratering.

USDJPY has been hitting new highs day after day, but the Korean won paused. A resumption of highs would be bad news for bulls because the Chinese yuan will follow.

Gold made a new low this morning. It is going to plummet along with most other assets given how bonds and the U.S. dollar is behaving. It seems like everything is being suspended to prevent options from paying off at this month's opex.

The counter explanation is stocks are leading what will be a rally in all assets, including a reversal in the U.S. dollar, but the fly in the ointment remains stubbornly strong crude oil.

I posted a list of stocks last night. These are stocks that fell on high volume yesterday. There are a lot of symbols I've posted in previous months, going back to late last year. Many of these charts are already way down, yet also only now completeing topping patterns that point to far larger losses ahead. Point being, there are more targets than capital at this point. It's a shooting gallery for bears out there. If the indexes resume their move to new lows, there will be massive losses in the less liquid sectors of the market.

We Have a Ding

ZB hit my measured move target today, based off the non-lockdown peak. On many charts, but not all, I ignore both the March 2020 panic move and also for commodities, the Russian war spike. These can't be wholly discounted, but since they were such brief moves, I treat them as low information unless they fit into a pattern. One way it could fit in would be a mirror spike down in market panic. That would take ZB down to the 113 area.

A similar move in TLT would take it to the $90 area.

I have talked about that target before. Here on August 31:

With the caveat, if bonds continue lower, a breakdown in ZB and breakout in 30-year yield correlates with about 5 percent interest. That isn't a crazy target when considering the Federal Reserve is talking about a 4-percent Fed Funds rate. I do expect deflation and a rally in long bonds, but if I'm wrong, it isn't a wild target. It would take ZB and TLT back to 2007 levels of around 110 and $90 per share. Note that TLT is dividend adjusted, remove that and you will see TLT at $90 when the yield was around 5 percent.

I'll also not that the new buzzword from Fed watchers is a 5 percent Fed funds rate.

Better Off Red

ZB is heading for the measured move target of 121. TLT is in free fall. I do not know if 121 will hold or not. I'm agnostic here. As I've said before, I think ZB can bounce as stocks crater and it can bounce with a bull rally. If it is falling, then stock are probably going lower. ZB is at a new 52-week low. Don't over think it.

Gold, copper and oil are all below important horizontals that mark topping patterns. All three have collapse analogs. The Federal Reserve is doing what they did when commodities collapsed over the past decade. The charts are rolling over into h-like patterns. I have a simple two-part thesis. One, I think these charts are going lower. Two, if these charts go lower, they complete setups that forecast plunging prices. If they go lower, they go way lower. So I buy OTM puts. Since gold has lower expected volatility, I went with that one. I have November $150 strike puts on GLD.

Stocks say hold your horses. I can't ignore the counter-signal from the market because it can be a predictor. For now that's all it is, a prediction. Everything else says stocks are experiencing an internal technical move that will lose steam. Stock will recouple with commodities and bonds, and sink.

You know what didn't rally? Energy. I closed weekly puts I opened yesterday. I may or may not open them again. I am still holding some OTM COP puts for November. I also closed my USO puts that expire Friday yesterday. I may or may not reopen that position because as I posted yesterday, I think it's time for XLE to underperform USO. If oil goes higher, that is probably bad news for stocks and bonds.

I can see outlines of a dollar top in the euro, maybe even the Korean won, but not in the Japanese yen. Not the Chinese yuan. Currency crisis only needs one player. I view this as a high stakes situation because DXY is advising some caution that will be warranted if USDJPY tops out. The flipside is China could be forced into letting the yuan drop and last time that happened, stocks went almost straight down 10 percent in much better macro conditions. I'm playing the possibility of this with OTM puts on EEM for November. There's no support if emerging markets break lower and China is their lodestone.

Finally, BTC. It ain't screaming sell everything yet, but it also ain't rallying.

These aren't my only trades listed above, only ones relevant to these charts. My first thought will be to add more BigTech, energy and consumer staples shorts if the market turns lower. I did jump into some Apple November puts yesterday. Earnings season makes single-stock options trades pricier, but I might put some on in special cases or post-earnings.

ES Fills the Gap, Commodities Down, Bonds Flat, Dollar Up

Stocks are racing ahead of everything else if a rally is coming, or they've gotten overextended before a new low is made 10 to 15 percent lower, leaning towards 15 percent since there's much more fuel for a drop now. Conversely, the move to the gap was where I was expecting stocks could move on this rally. Beyond this and things are much more bullish than they appear. The entire market activity since June looks like a complex double bottom. Stocks will likely rally into the new year if this holds, possibly into spring. From a societal perspetive, this is almost a worst case scenario because I can only imagine how many people will be trained to hold no matter what, and I still expect a massive bear market has begun. The 3820 level is only a stones throw away and if that base completes, a rally up to the 4000 area is possible.

Finally, I do not foresee commodities such as oil rallying with stocks from here. If wrong about that, then seriously consider moving your assets into secure political jurisdictions and prepare for either far-left or far-right populist governments. The public is already at a breaking point, but continuation of an economy that shovels "wealth" into the pockets of the "1 percent" at the price of impoverishing the "99 percent" will eventually catapult the first guy who says he'll smash the 1 percent into power. The 1 percent of course being whatever he convinces the public they are, but as we've learned the past two years, people can be convinced to do anything including wearing useless masks 24/7 and cheering for nuclear war.

While You Were Bullish

I've been moving put positions into November. Otherwise no major changes. I'm prepared for upside to 3750. On the bearish side, weakness in gold, bonds, crude and yen seems more important than today's stock rally. The stock market struck me as more solipsistic than usual today.

I tried adding some yuan positions, but couldn't get a good fill. Went with more indirect plays via equities.

Huge PPI Miss

Markets are calm after a huge PPI miss (in my opinion). I expected PPI would come in cool because of falling commodity prices, and thereby set-up a strong rally into tomorrow's CPI report that would either fail miserably or trigger a melt-up squeeze before giving way to new lows. There is still a risk of a cooler CPI for bears, but the odds of that are lower following the PPI.

ZH: Food Cost Jump Sparks Hotter Than Expected US Producer Price Inflation

Ex-Food, Energy, & Trade, PPI rose 0.4% MoM (double the expected +0.2%).

Both Goods and Services PPI are rising with Food increases dominating...

Finally, we note that the pipeline of PPI pain is easing further as intermediate goods inflation eased further...

Inflation is cooling for sure and monetary effects are lagging. Yet remember what Powell said this summer (paraphrasing), "We don't really know anything about inflation..." Yesterday, this article went viral on finanacial social media: Fed’s Inflation Fight Has Some Economists Fearing an Unnecessarily Deep Downturn

Traditionally, the Fed set policy based on forecasts of inflation, which lags behind changes in output. But officials now are reacting more to the latest inflation data “because they have absolutely zero confidence in their ability to forecast inflation,” said Nathan Sheets, chief global economist at Citigroup. He said he is concerned the Fed will overdo rate rises but concedes inflation in the service sector is “pretty concerning.”

I don't see how a central bank cannot overdo it when fighting inflation because it is the only way to be sure. They have to nuke inflation from orbit. The added factor is that they don't trust their inflation forecasts. Every month that doesn't show collapsing inflation is a month that doesn't cause any doubt about rate hikes at the Fed.

My scenario for this year is that inflation does cool, but then accelerates in 2023. Another scenario that will take longer to develop: the market sinks even as inflation drops because the Fed won't change course. Real interest rates will accelerate via falling inflation. Assume the Fed pauses at 4.75 percent. If CPI falls from 6 perecnt to 3 percent, real interest rates rise from -1.25 percent to +1.75 percent. In bear markets, all macro scenarios result in lower stock prices.

Not much has changed with charts the past few days. Some charts remain important such as USDCNY because I still expect a possible yuan depreciation, but that's not chart-centric. Instead, ZB looks the most compelling because it is sitting near the 52-week low. It is also coming within spitting distance of the measured move off the topping pattern (yellow horizontals indicate the top and the target). Note I am ignoring the March 2020 spike when measuring the top.

I've been wrong about ZB, TLT and government bonds finally catching a bid as the market drops. However, if there is a capitulation drop coming this month, then I envision ZB making a quick drop to around 121 before recovering, but equities continue falling. This "safe haven" behavior will indicate equity investors are finally capitulating and also turning to the "safety" of bonds. Safety in quotes because this year has shown they are not safe. The shift in psychology will be investors deciding bonds are safer than stocks. 

If I'm wrong, so be it. I have no position on TLT at the moment. I will also note TLT broke my lifetime support line. It's also possible a twin crash happens in stocks and bonds simultaneously.

Rally On, But For How Long?

ZB had a fake out and now trying to make a breakout from its relentless collapse channel in place since August 1.

Everything up to the next horizontal line is open on the ES.

I have many chart alerts set for reentry. For now, I'm mostly cash and long TLT with a few short positions remaining.

Crash or Rally Day 2

I have missed out on substantial downside profits the past couple of days by moving to cash. I can't complain though. I tenex'd my Apple position by buying puts in mid-August, sidestepping that big rally in early September, and then re-entering. My smaller trading account, an old Roth IRA that I converted to YOLO status this year, also increased nearly 10 times in the past six weeks. I sold the bulk of my remaining Apple puts yesterday. I also sold my EEM puts which were an 8x. I lightened up on XLP, which had been YOLO sized. I plan on getting back in after what I suspect will be a rally, along with a few new and old positions such as my Canadian bank puts.

I come into the day with some small positions on DOW, FCX, ASHR and XLP, along with a small OTM runner call position on SPY which I may daytrade into size today, along with a substantial long position in TLT including what are now 0 DTE calls. I bought 20ish delta calls for October and November which could remain.

The market has developed a diamondy pattern this week. Diamonds are rarely clean, but the form is there. The moves out of diamonds are typically powerful. There's a case either way because a move down will bring many many put positions into the money negative gamma effect will kick in as market makers have to hedge. There's also a case for rally because the market is overdue for one. Since the market failed at 3750 two days ago and has struggled around 3700, bears have been emboldened. Almost every rally was sold yesterday. Yet from around 10:30 AM and 3:10 PM, there were two powerful rallies of about 40 points on the ES.

What I was watching most of the day was the up minus down volume. Both of those rallies came on brief interruptions in the selling. Not net buying. You can barely see the 10 AM rally on the volume and you can see a small shift into up volume buying late in the day, but on net it was a small move. My sense of the market here is that it will take something like a panic to shake more sellers out, but there is a high risk of panic in these conditions. I'm not downplaying the possibility. On the other side, all it will take is some positive net buying to unleash a ripping rally for as long as the buying lasts. I suspect something like 100 points would come quickly if they buyers finally step in, if 40 points came when buying and selling volume were merely in balance. My bias here is to buy a dip, but it is not strongly held.

Bonds will rally if stocks rally. There is a rather sizable inverse H&S pattern formed on ZB and it has a target at the former mid-June low. That is about a 3 percent move. I could see that being traversed today if the market rallies. Conversely, it won't take much weakness to invalidate this pattern. The core PCE was higher than expected in August and increased the overall inflation rate, not bullish for bonds, although perhaps it wasn't bearish enough with home prices and rents now falling in September...

I like ZB and TLT as longs as the calendar turns to Q4. Not because I expect the Fed to follow the BoE with a new round of QE, but rather I see a combination of inflation coming down, potential stock panic fueling some safe haven buying and less room for losses. As long as inflation doesn't reaccelerate, it's at a level where there isn't substantial downside on the long-bond in late 2022. On balance, that can fuel a rally for a time even if it heads lower later this year or next.

BTC still hasn't cracked.

The Dollar Index looks similar to March 2015, but as I've been saying, "it ends when it ends." Assuming the stock market goes lower in October, there's still risk of massive depreciation in export currencies including the Chinese yuan.

The market will be easier to trade if it rallies, but the market doesn't have to make it easy to trade. The trend is down because this is a bear market. Tesla broke support on Thursday. The market has shown Apple is not safe. Both stocks are overloaded with bulls who still think this isn't a bear market. Yesterday, both stock showed they can wreck the market if they lead on the downside. I think both will fall hard in the next month or so, though maybe not today. If you've held puts/shorts until now and you have enough time, the coming rally shouldn't develop into a profit-crushing move. I use much shorter-term options and therefore have sold out. I would see my profits collapse if the market rallies. If it turns out I am wrong and the next move is a larger rally, I would have seen my profits completely wiped out.

Ragnarok

Apple is having trouble this morning after a news drop last night. The Bank of England restarted QE today. We're into the "this is serious" phase of the downturn where bad news and policy intervention start driving markets. For its part, the U.S. government and central bank remain on course. U.S. officials up to Janet Yellen have said there's no problem in financial markets, there's no need to slow the rise in the dollar. The Federal Reserve acknowledges what's happening, but hasn't changed its rhetoric one bit. Powell speaks today though...

Stocks were overdue for a rally. Bonds are rallying for a similar reason and probably because traders are thinking, "if the BOE is doing QE again, the Fed won't be far behind." If 2008 is a template, there is only one to two days of rally possible. I will become aggressively short above 3700 if the ES should get there. BTC is hanging on. I don't want any spare capital when BTC breaks that trendline. I want to be 100 percent in short positions.