VIX pulled back, challenging the weekly Cycle Top at 22.62 and closing beneath it. However, the uptrend isn’t broken. The Cycles Model suggests that, while it may take a brief rest, strength may recover in the VIX through the end of January.

(Bloomberg)  Going strictly by the VIX, the U.S. stock market just saw its biggest weekly drop in volatility since March. Go by traders’ nerves and you’d have a hard time framing the past few days as anything but another trial for markets that have known little but upheaval for three months.

Exhausted by December convulsions? You’re getting no respite in January, as Thursday’s 2.5 percent S&P 500 plunge gave way to a 3.4 percent rally, the third biggest since 2012. Investor sentiment that was throttled by Apple’s revenue warning was revived by the best employmentreport in 10 months and calming words from Federal Reserve Chairman Jerome Powell.

SPX continues rally, but not out of the woods

SPX continued its rally after a bounce from its 7-year trendline last week. However, it is likely to retest the uptrend from the October 2011 low at 2350.00 again. The media is upbeat, but the SPX is not out of the woods.

(Bloomberg)  Stocks surged, the dollar weakened and Treasuries tumbled with gold as a risk-on tone gripped financial markets after investors got good news on the economy, Federal Reserve policy and trade tensions.

The S&P 500 rallied 3.4 percent, the Dow Jones Industrial Average roared higher by almost 750 points and the Nasdaq 100’s surge topped 4 percent. All of the blue-chip index’s 30 members advanced. The rally didn’t surpass the post-Christmas breakout, but it ranked among the steepest of the bull market.

NDX also bounces back to the neckline

NDX continued its bounce to retest the Head & Shoulders neckline at 6442.36 again. This constitutes a 45% retracement of the December decline. The Cycles Model calls for a resumption of the decline.   

(ZeroHedge)  Previously we noted that while a variety of hedge funds, ETFs and central banks are getting slammed by today's 9% drop in AAPL shares, few have been as badly hit (even if they can more than afford it) as Warren Buffett, whose Berkshire Hathaway is looking to lose more than $3.8 billion on its AAPL position thanks to his holdings of 258 million shares of Apple stock which make him the third biggest shareholder after passive investors Vanguard and BlackRock.

Today's drop brings Berkshire's holdings to about $36 billion, and a $3.8 billion loss, and has also hammered Berkshire Hathaway's Class A stock which is down more than $15K today, or 4.93%, its biggest one day drop since the February 5 VIXtermination event. Ignoring that one-time drop which quickly reversed, one would have to go back to August 2011 when the US was downgraded, to find an even bigger drop.

High Yield Bond Index tests Long-term resistance

The High Yield Bond Index continued its rally to retest Long-term resistance at 194.12. MUT continues to be on a sell signal. The Cycles Model suggests that whatever year-end strength it may have may have been used up by pension rebalancing. The 7-year Trendline is likely to be retested by the end of January.

Treasury bonds challenge the neckline

The 10-year Treasury Note Index challenged the Head & Shoulders neckline at 123.00, closing beneath it and completing its retracement rally. The Cycles Model suggests a loss of strength over the next three weeks or more.

(Bloomberg)  Federal Reserve Chairman Jerome Powell finally decided that the stock market’s tantrum over the past month was too noisy to ignore. 

Traders bemoaned the fact that Powell considered the central bank’s balance-sheet runoff to be on “automatic pilot.” So he softened his tone on Friday during a panel at an American Economic Association meeting in Atlanta, saying policy makers “wouldn’t hesitate to make a change” if necessary. Investors were unhappy that Powell shrugged off swings in the stock market as “a little bit of volatility” that shouldn’t do much harm to the economy. So he assured them that the Fed is listening carefully to the market’s concerns about downside risks. He and his predecessor, Janet Yellen, both reminded listeners about 2016, when the median projection among officials was for four rate increases, yet they only went through with one.

The Euro still trading “in range”

The Euro is still consolidating between the previous weeks’ high and low, making another “inside” week. It continues on a sell signal with no impulse in either direction. However, there is a potential Head & Shoulders formation beneath 112.00 that suggests a downside target.  

(StarTribune)  On its 20th birthday, the best that can be said of the euro — the European currency used by 19 countries — is that it has survived. Two decades after being introduced in 1999, it has not achieved its central goals: increasing economic growth and strengthening public support for European political institutions.

In many ways, just the opposite has occurred. The economy of the eurozone (all the countries that adopted the euro — Great Britain and some other nations declined to join) still lags behind the United States in growth. For 2019, growth is forecast at only 1.6 percent, compared with 2.6 percent for the United States.

Even worse, the contentious negotiations over rescuing the eurozone’s weaker members — Greece, Spain, Portugal and Italy — have left a bitter aftertaste. Debtor countries feel they were treated badly by the wealthier creditor countries, particularly Germany. Meanwhile, the creditors resent having to bail out their poorer neighbors. Animosities remain.

EuroStoxx continues the rally

The EuroStoxx continued its rally toward its Cycle Bottom resistance, if it can make it. The Cycles Model suggests another possible week of rally, but lack of liquidity and investor sentiment may not permit it.  

(CNBC)  European shares extended their gains in Friday trading, following stronger-than-expected nonfarm payrolls data out of the U.S. which rode off the back of news that China and the U.S. will have further trade talks next week.

The pan-European Stoxx 600 index rallied 2.8 percent provisionally, with all sectors and major bourses in positive territory. The German Dax ended up by 3.3 percent. Britain’s FTSE 100 ended Friday higher by 2.2 percent.

Basic resources stocks — with their heavy exposure to China — were the top gainers in Europe after China’s commerce ministry said the U.S. and China would hold vice-ministerial level negotiations over trade in Beijing on Jan. 7-8. Auto stocks were also among the top gainers. This is a sector highly sensitive to trade dynamics.

The Yen rallies toward its Cycle Top

The Yen rallied nearly to its Cycle Top resistance at 93.79, but finally ran out of time. The rally culminated in an inverted master Cycle high, but may reverse as quickly as it rallied. The squeeze of the Cycle boundaries imply a strong reversal may be at hand. In other words, the rally may be a fake out.

(Reuters) - The yen rose against the dollar and euro on Thursday as investors sought the perceived safety of the Japanese currency after a surprise revenue warning from Apple Inc exacerbated concerns about a Chinese and global economic slowdown.

Data showing U.S. manufacturing activity slowed sharply to a two-year low in December, and a drop in two-year Treasury debt yield below a key Federal Reserve rate, the first such occurrence since 2008, exerted further pressure on the greenback.

The fed funds effective rate is the Fed’s key policy rate. The market move suggests investors believe the central bank will not be able to continue to tighten monetary policy as its forecast suggests.

Nikkei still in the doldrums

The Nikkei suffered losses this week that couldn’t be made up in one market day. It may have just another day or two to retest round number resistance at 20000.00. Usually a bounce like this may last two to three weeks. It may be running out of time.

(ChannelNewsAsia)  Tokyo's key Nikkei index plunged more than three percent in opening trade Friday, hit by a surge in the yen and sell-offs on Wall Street amid worries over the US economy.

In its first trading session of 2019, the benchmark Nikkei 225 lost 3.32 per cent, or 665.37 points, to 19,349.40 as it was catching up with other markets after the New Year's break.

The broader Topix index lost 2.93 per cent, or 43.72 points, to 1,450.37.

Since the last session in Tokyo on Dec 28, heavy selling has hit global markets.

U.S. Dollar tests mid-Cycle support

USD declined to test mid-Cycle support at 95.33 before closing above it. The USD remains on a sell signal. The Cycles Model suggests weakness for the next 4 weeks.   

(Reuters) - The U.S. dollar retreated against the euro on Friday, giving up all the gains logged after a robust U.S. jobs report, following comments from Federal Reserve Chairman Jerome Powell that the U.S. central bank will be sensitive to the downside risks the market is pricing in.

“We will be patient as we watch to see how the economy evolves,” Powell told the American Economic Association on Friday.

Powell said the Fed is not on a preset path of interest rate hikes and suggested that it could pause its policy tightening as it did in 2016.

Gold hits 1300, but can’t hold it

Gold’s final probe to the high was extended into the first week of January. It hit 1300.40 on Friday morning, but couldn’t hold it. The right shoulder of a potential Head & Shoulders formation is complete and the reversal may have begun. The more recent Head & Shoulders formation matches targets with the already existent Broadening Wedge formation.

(CNBC)  Gold prices fell on Friday, pulling back from a more than six-month peak hit earlier in the session, after stronger-than-expected U.S. jobs data, while palladium prices punched through the key $1,300 level for the first time.

Spot gold slipped 0.78 percent to $1,283.56 per ounce as of 2:00 p.m. ET, after dropping as much as 1.3 percent to $1,276.40.

The metal was however on track for a third straight weekly gain, up about 0.2 percent so far, mainly helped by recent strong gains. It touched its highest level since mid-June at $1,298.42 earlier in the day.

U.S. gold futures settled down $9.00 to $1,285.80 per ounce.

Crude retests the Broadening Wedge trendline

Crude oil retested the Broadening Wedge trendline, but pulled back. It may probe toward Short-term resistance at 51.21 before a reversal. Should it not make it through the trendline on the bounce, the decline may resume through the end of January.

(RigZone)  Bullish sentiment in the crude oil market for the initial trading days of 2019 continued Friday.

The February West Texas Intermediate (WTI) futures price traded as high as $49.22 a barrel before settling at $47.96, reflecting an 87-cent gain for the day. The intraday low for the contract was $46.65. Brent crude oil for March delivery rose $1.11 Friday to settle at $57.06 a barrel.

“WTI and Brent managed to start off the New Year with substantial gains over the first three days of the year,” said Tom Seng, Assistant Professor of Energy Business with the University of Tulsa’s Collins College of Business. “That momentum carried into today with WTI cresting the $49 mark, the highest in 11 trading days and a gain of almost 10 percent for the week.”

Shanghai Index makes a new low

The Shanghai Index found a new low to bounce out of, but may not have completed its decline. The Cycles Model correctly anticipated further weakness extending into the month of January. It may continue to decline with a potential bottom near 2000.00-2200.00.

(Bloomberg)  China’s equity investors finally got some relief at the end of a week that saw indexes sink to multiyear lows.

Word that top officials had met with banks helped revive risk appetite, with brokerages surging as traders took it as a sign that Beijing would prioritize the financial sector. A reserve-ratio cut from the central bank after Friday’s close added to the bullish sentiment, sending equity futures higher in Singapore. The boost comes ahead of a U.S. visit to Beijing to talk trade, and any hints of improving relations could give Chinese stock another lift.

Investors aren’t rushing to hedge against equity swings despite the wild trading. Hong Kong’s volatility index is actually down this week, while another tracking expected swings on the biggest China ETF in the U.S. is barely above its 12-month average. Lessons from the past show the first weeks don’t always set the tone for the year: take 2018, which started with what we can now call exuberant trading.

The Banking Index extends its bounce

BKX extended its bounce toward the Head & Shoulders neckline, but may not make it. The Liquidity Model suggests today may offer the last bit of strength. The Cycles Model suggests the decline may resume to meet the implied Head & Shoulders target by mid-February.

(CNBC)  China’s central bank said on Friday it was cutting the ratio of cash that banks must hold as reserves by 100 basis points (bps), or 1 percent, as it looks to reduce the risk of a sharper slowdown in the world’s second-biggest economy.

The cut in banks’ reserve requirement ratios (RRR) is the first in 2019 and the fifth in a year by the People’s Bank of China (PBOC) as the economy faces its weakest growth since the global financial crisis and mounting pressure from U.S. tariffs.

(ZeroHedge)  As the Frankfurt-based bank's shares plumbed all-time lows last month following news that it had gotten itself entangled in two new legal scandals - one related to facilitating tax evasion that purportedly stemmed from the Panama Papers leak, and another related to the bank's provision of clearing services to Danske Bank's Estonia branch, the epicenter of one of the biggest money laundering scandals in European history - news that DB had paid a relatively insignificant 4 million euro settlement to Frankfurt prosecutors over its role in facilitating so-called "cum-ex" trades for clients who used them to falsely claim tax rebates barely registered.

But as has become sadly typical for DB, which has cultivated one of the most ignominious post-financial crisis records for financial improprieties among the world's biggest banks, the settlement wasn't the end of it. And in an explosive report published Friday, reporters for Reuters working with newsroom non-profit Correctiv published details from internal audits commissioned by DB which revealed that employees for the bank were aware of their clients' plans to illegally exploit a loophole in the German tax code - a loophole that was closed back in 2015 - something that was not previously publicly known.

(ZeroHedge)  Before they came to power, Italy’s populist leaders pilloried bankers and painted themselves as champions of the little guy.

Now that an Italian lender is in trouble on their watch though, they may be considering throwing taxpayers’ money at the problem -- just like the last government did.

The European Central Bank placed Banca Carige SpA in temporary administration this week, wielding its power to intervene for the first time and leaving Deputy Premiers Luigi Di Maio and Matteo Salvini to handle the political fallout.

With about 25 billion euros ($29 billion) in assets, Carige poses no systemic threat in itself, and Five Star leader Di Maio and Salvini, of the anti-immigration League, don’t want to be seen to be helping an industry they’ve portrayed as exploiting ordinary Italians. But they can’t afford to be in the frame either if Genoa-based Carige collapses, leaving depositors and creditors on the hook.