Yesterday, the S&P 500 futures (ESU16:CME) made a high at 2172.25 on Globex, and made a morning session high at 2171.00 before falling down to 2155.75 at 11:25 CT as crude oil sold off down to 43.00. There has a been a lot of buying going on in the S&P and a lot of selling going on in crude oil. Back on July 11 I wrote an Opening Print titled BUY S&P / SELL OIL (https://mrtopstep.com/buy-sp-sell-oil). At the time the ESU16 was trading at 2128 and oil was trading at $45.40. Since then the S&P has rallied as much as 2% and crude has dropped 5.5%.

Beyond all the economic and earning reports this week, the central banks are back in the spotlight. Today starts the two day U.S. Federal Reserve meeting. Traders are waiting to see if there will be any further monetary stimulus out of Europe and Japan to offset any negative impact caused by Brexit. Traders in the U.S. will be waiting on Wednesday afternoon for any clues as to whether the Fed will raise interest rates in the third quarter and beyond after a series of better than expected economic data. Right now the rally in the stock market isn’t so much the fundamentals. The rally is being driven by the continued intervention by the central banks and its zero borrowing cost which is pushing money back into the US stock markets.

One of the things I have tried to do is to explain how the historically low rates have made it a ‘no place to go but stocks’ environment, and clearly the Fed’s inability to hike rates has played a major role in the S&P’s push above 2200.00. Clearly the central banks have been underwriting the overall risks to the markets. How long can this go on? Nine years after the onset of the 2007 credit crisis there seems to no change in mindset of the global banks.

Over the last few weeks I have continued to point out how crude oil futures has done a reversal of how it acted when it was going up. When oil sold off, buying would show up above and below the VWAP, but since the move down oil has been unable to hold the VWAP. The chart below clearly shows when oil rallied / short covers you see selling just below and just above the VWAP. It was a very distinctive pattern when oil was going up, and it’s just as distinctive on the way back down.

Nearly two weeks ago when the ESU16 was first touching the 2160 area and I said the next 40 handles from that price would be lower. There were some on Twitter who agreed and some who disagreed with the call. At this point, it’s not that I have been wrong, we just don’t know yet. I thought that this week would give a better clue of where those next 40 handles may come. Tomorrow’s FOMC should be that catalyst, but I am not sure how long it will take to print 2120 or 2200.