Models Suggest Rough Week Ahead For SPX

VIX rallied to a new 2-month high on Thursday and closed above Intermediate-term support at 15.84, confirming a new buy signal. Analysts don’t seem to be paying much attention to the fact that the VIX is not only above all critical resistance levels (15.84 – 16.34), but also above its 12-month average of approximately 15.90. Things can happen quickly and violently at these levels.

(CNBC) An optimistic jobs report is helping stocks recover from this week’s brutal sell-off, and helping investors shrug off onrushing recession fears as unemployment hits a new 50-year low and payrolls rise by a better-than-expected 136,000.

As the markets breathe a collective sigh of relief, it’s beginning to look like the volatility that flooded in earlier this week might be leaving as quickly as it entered. Just Thursday, the Cboe Volatility Index (VIX) spiked to 21.44 – its highest level in nearly two months – before finishing safely back in the teens.

SPX recovers from a 4.5% decline

SPX declined to 2855.94, with a loss of nearly 4.6% on Thursday before a sharp reversal off the low recovered the bulk of the losses. However, it closed beneath Intermediate-term resistance at 2952.40 and at the trendline of the Diamond formation. This is known as a bearish backtest that may lead to a flash crash with a similar target as “Point 6” of the Orthodox Broadening Top.The Cycles Model suggests a rapid decline ahead. Prepare for a potential “limit down” next week. 

(Bloomberg) U.S. stocks gained along with Treasuries after solid hiring data quelled recession fears without crushing the odds of future Federal Reserve easing. The dollar declined.

The S&P 500 rose the most in seven weeks -- though still suffered its third weekly loss -- after payrolls slightly missed estimates for September, while August’s reading was revised upward. Traders trimmed their bets on the results, but the odds still favored a Fed rate cut this month. Chair Jerome Powell did little to change the speculation, saying Friday the economy “faces some risks” but is overall “in a good place.”

   NDX round trips back to the Diamond Trendline

NDX had a loss of 6.4% in the first three days of the week before flipping higher on Thursday and closing at the Diamond formation for a weekly gain. This action does not nullify the Diamond formation Its target agrees with “Point 6” of the massive Orthodox Broadening Top formation. We seldom have multiple confirmations of the general market direction, but in this case it should put us on high alert for a decline beneath the lower trendline at 7750.00 for a confirmed sell signal.  

(ZeroHedge) A return to macro is on every money managers' mind this week as global equity futures plunge to a one-month low following US manufacturing activity tumbling to levels not seen since the last financial crisis.

And more evidence of global slowdown was found in the latest report from the Semiconductor Industry Association (SIA) on Tuesday, who warned, semiconductor sales are plunging around the world. SIA said worldwide sales of semiconductors were $34.2 billion in August, a 15.9% drop YoY. 

High Yield Bond Index bounces at Diamond trendline support

The High Yield Bond Index declined to test trendline support at 200.00 where it bounced. A decline beneath it invokes a sell signal. The Cycles Model warns the next step down may be a large one.   

(ETFTrends) In recent weeks, Sage has become more cautious on lower-quality corporate bonds. Our caution is based on the following signals.

1. Abnormal Performance – High-yield bonds have performed well on an absolute-return basis this year, returning nearly 12% in 2019. Years of double-digit returns for high yield are rare and are typically followed by much weaker returns the following calendar year.

2. Relative Value – High-yield bonds have dramatically outperformed investment grade corporate debt this year, and particularly in the past few months. The spread premium paid by high-yield bonds compared to investment grade bonds has narrowed to its lowest level in 2019 and is near historic lows.

Treasuries make a steep retracement

The 10-year Treasury Note rallied within 7 ticks of its previous high in a very extended Master Cycle. It appears that the UST Cycle is lining up with the equities Cycle and this rally may be a trap for unwary investors.The Cycles Model suggests the decline may resume through mid-October.

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Disclaimer: Nothing in this article should be construed as a personal recommendation to buy, hold or sell short any security.  The Practical Investor, LLC (TPI) may provide a status report of ...

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