VIX rallied above its Cycle Top support at 19.51in a confirmed buy signal. The Cycles Model shows a likely surge in strength for the VIX through late October.

(CNBC)  Wall Street's favorite fear gauge, the Cboe Volatility Index, hit its highest level since mid-February as traders accelerated stock selling during Thursday afternoon.

The VIX hit a high of 28.84 after 2 p.m. ET, its highest level since Feb. 12, 2018.

The VIX measures the prices of put options on the S&P 500 versus the prices of call options. A rising VIX theoretically means investors are getting more concerned about the market and placing more bets to protect themselves.

SPX closes above Long-term support

SPX challenged Long-term support at 2763.66 before closing modestly above it but beneath its 2.5-year trendline. This may give stocks a temporary respite from the decline but an important resistance has not been overcome. Failure to maintain that level implies a continuation of the sell signal.  The Cycles Model now implies a powerful decline with increased volatility that may last through late October. Next week is options expiration week which may magnify market volatility.

(Bloomberg)  You could write it off as a fluke in February. When it happened again in March, people got concerned. Now stocks are tumbling a third time in 2018, and investors are starting to sense something has changed.

A smattering of 3 percent plunges may not make a bear market, but it sure is a break from the past, which saw only three such ruptures over six years. Selloffs are getting more common -- though no easier to withstand. Tech has been bleeding red, Trump is railing at the Fed, and stocks that sat comfortably at record highs just three weeks ago have had just one up day in seven sessions.

NDX closes between Long-term support and its 2.5-year trendline

NDX broke through its 2.5-year trendline and Long-term support, but was only able to bounce back above support and not the trendline. The 1.5-year throw-over may now be at risk as the next support may be the 7-year Ending Diagonal trendline at 6250.00. The weakest part of the Presidential Cycle often occurs in October. The Cycles Model agrees that October may be especially hard on stocks.

(ZeroHedge)  The sell-off post-mortems continues, and with human action seemingly unable to explain what happened on Wednesday and Thursday, especially at or around the 3pm selling peak observed on both days, attention is now focusing on quants, algos and other machines that may have been involved in indiscriminate selling.

To be sure, we noted on both days that CTAs, or momentum chasing systematic funds, had finally joined in the fray, and once the selling accelerated it was only a matter of time before specific selling triggers were hit on both Wednesday and Thursday. Now old-school - and angry - fund managers are chiming in, with Omega's Leon Cooperman picking up where the February selloff left, and placing the blame squarely on the machines:

High Yield Bond Index sells down to Long-term support

The High Yield Bond Index appears to have taken out all short-term supports in a two day sell-off, closing just above Intermediate-term support at 197.61. Should it decline further, a sell signal may be confirmed beneath Long-term support at 193.99. High yield bonds are also anticipating further weakness through the end of the month.

(Bloomberg)  Investors pulled $4.9 billion from U.S. funds that buy speculative-grade debt during the past week amid a global sell-off in stocks, rising interest rates and tensions over trade.

The outflow for the week ended Wednesday was the biggest since February, according to Lipper and is the fourth biggest on record.

Investors have grown increasingly concerned over the potential impacts of a trade war. Strong labor markets and economic growth have made them wary of faster-than-expected rate hikes by the Federal Reserve, worsening the pain for speculative-grade borrowers.

UST gets its reversal

The 10-year Treasury Note Index bounced this week, as anticipated. This may allow a rally back toward Long-term resistance at 120.24The Cycles Model allows approximately another week of rally that may achieve only limited success, barring a market disturbance that may take bonds higher.

(CNBC)  U.S. government debt yields rose on Friday as equities bounced back from a steep sell-off that has shaken Wall Street this week.

The yield on the benchmark 10-year Treasury note was higher at around 3.17 percent, while the yield on the 30-year Treasury bond traded at 3.34 percent. Bond yields move inversely to prices.

Equity markets reclaimed some ground after posting solid losses over the last two sessions. The Dow Jones Industrial Average rose more than 250 points in volatile trading and gained as much as 414 points.

The Euro bounces at mid-Cycle support

The Euro bounced above mid-Cycle support at 114.69 to test Short-term support at 115.75 this week. Should it continue to rally above this level it may be capable of reaching Long-term resistance at 119.24. However, Cyclical strength may run out sooner than expected. If so, the decline may resume through mid-November.   

(Bloomberg)  Domestically generated euro-area inflation -- the average of a range of indicators used to assess homegrown price pressure -- has clearly climbed from a trough in 2016, but remains well below the rate consistent with the European Central Bank meeting its target, according to research by Bloomberg Economics. The measure driving up the top end of the swath is unit labor costs -- the only gauge that directly includes wages, suggesting that the euro-area economy has wage pressure, but that’s yet to be fully reflected in prices. Still, that may only be a matter of time: Because the labor share of income is close to pre-crisis averages, companies don’t have huge margins to absorb higher pay demands and will need to pass those costs on to consumers.

EuroStoxx plunges through the Head & Shoulders neckline

The EuroStoxx plunged through the Head & Shoulders neckline a 3265.00 to trigger yet another sell signal…with a target. The Cycles Model suggests a probable 2-week decline that may reach the Head & Shoulders target.

(Reuters) - European stocks failed to stage a recovery on Friday, posting their worst week since a market correction last February as a new sell-off hit bourses across the globe, amid worries about protectionism and fast-rising U.S. interest rates.

Euro zone stocks initially jumped one percent but rapidly shed all of their gains despite Wall Street opening higher.

All major bourses closed in negative territory and the main regional index .STOXXE ended the day down 0.2 percent and on a weekly loss of 4.8 percent.

That’s just below the 5.1 percent fall back experienced last February when a sudden scare about rising inflation and interest rates caused a global market correction.

The Yen rallies to resistance

The Yen continued its bounce, testing Short-term resistance at 89.31. The Cycles Model calls for an additional one week (possibly more) decline that may reach the proposed “point 6” in the structure of the Orthodox Broadening Top.

(Nasdaq)  The U.S. Dollar fell sharply against a basket of currencies on Wednesday. The greenback was pressured primarily by a combination of a sharply higher Japanese Yen and a firm Euro.

The steep drop in U.S. equity markets drove investors to seek shelter in the safety of U.S. Treasury markets. This drove down yields which made the U.S. Dollar a less-desirable investment.

The plunge in stocks also helped support the Japanese Yen because of the carry trade. When risk is off, investors sell the dollar and buy the Yen to pay back loans from Japanese banks. Some traders call this taking protection in the lower-yielding Japanese Yen.

Nikkei plummets to critical support

The Nikkei plummeted to Long-term support and its 2-year trendline at 22518.81, closing above it. The Cycles Model calls for a probable continuation of the decline to follow.  Should the trendline be broken this week, the decline may last through the end of the month.

(Bloomberg)  The sell-off that struck the U.S. overnight ripped through Asian stock markets Thursday, with indexes in Japan, Hong Kong and China tumbling at least 3.5 percent.

All but one stock listed on Japan’s Nikkei 225 Stock Average retreated, while the country’s Topix index posted its steepest decline since March. China’s Shanghai Composite sank 5.2 percent to close at its lowest since November 2014, while the Hang Seng Index lost 3.5 percent. Taiwan’s Taiex index led the rout with a 6.3 percent slump.

U.S. Dollar consolidates beneath mid-Cycle resistance

USD consolidated beneath mid-Cycle resistance at 95.37 after challenging it for a second week. Just beneath it is Intermediate-term support at 94.81 which, if broken, yields a sell signal. The Cycles Model calls for a bearish month of October which may see the Cycle Bottom and Broadening Top trendline broken.    

(Reuters) - Speculators’ net long bets on the U.S. dollar climbed to their highest since mid-December 2016 in the latest week, according to calculations by Reuters and the Commodity Futures Trading Commission released on Friday.

The value of the net long dollar position was $27.79 billion in the week ended Oct. 9, up from $26.68 billion the previous week.

U.S. dollar positioning was derived from net contracts of International Monetary Market speculators in the yen, euro, British pound, Swiss franc and Canadian and Australian dollars.

Gold closes above Intermediate-term support

Gold rallied higher this week, closing above Intermediate-term support/resistance at 1220.55. It may now continue its journey to either mid-Cycle resistance at 1266.18 or Long-term resistance at 1281.69. The Cycles appears positive for gold through early November.

(Kitco)  The imminent short squeeze gold bulls had been waiting for since late July, was triggered yesterday after U.S. equities were down over three percent the previous session. Just after the London Metals Exchange (LME) opened yesterday morning, gold spec shorts slowly began to cover as Dow Futures were showing more weakness before the opening bell. Once the U.S. CPI inflation data came in lower than expected on Wednesday morning, managed money speculators began aggressively covering gold.

The combination of safe haven buying and lower than expected inflation forced the gold price up nearly 3% to a six-week high, while back-testing its 18-week moving average. Gold had yet to test this strong technical resistance level since breaking down below it in mid-April. The lower than expected inflation from the CPI may influence the Fed to hint of a pause in its rate-hike dot plot at the next FOMC meeting on November 7-8, which induced some of the speculative shorts to take their profit.

Crude declines beneath the Cycle Top support/resistance

Crude fell beneath Cycle Top support, testing Intermediate-term support at 70.05. WTI is on alert for a decline beneath that support, resulting in a sell signal. A further decline beneath the trendline suggests a change in short-term trend.

(S&PGlobalPlatts)  Crude oil futures were little changed in European morning trading Friday after falling by more than $2/b Thursday.

December ICE Brent was 33 cents higher at $80.59/b and November WTI was up by 64 cents at $71.43/b at 1017 GMT.

Compared with last Friday's settle, Brent was trading $3.56 and WTI $2.91 lower.

"Oil prices are recovering slightly this morning after nose-diving yesterday for the second day in a row," Commerzbank said in a commodity note.

Shanghai Index closes beneath the 2016 low

The Shanghai Index plummeted more than 10% in the past week, closing beneath its 2016 low. The Cycles Model suggests that new lows may be made before an oversold bounce ensues.

(Bloomberg)  Even for the world’s worst-performing stock markets, Thursday’s losses were extreme.

China’s benchmark equity gauge closed 5.2 percent lower, the biggest loss since February 2016, as a global sell-off spread. More than 1,000 stocks fell by the daily limit, or more than one in four. The Shanghai Composite Index ended below 2,600, a level not even breached during market crashes in 2015 and 2016.

Hong Kong didn’t fare much better, with the Hang Seng Index dropping 3.5 percent , the biggest in eight months. Tencent Holdings Ltd., the most valuable stock listed in Asia, slid 6.8 percent to extend a record losing streak to a 10th day.

The Banking Index slices through the neckline

BKX pierced the Head & Shoulders neckline at 105.00 this week, confirming the sell signal. The Cycles Model implies a continued decline for another two weeks. However, the market may become very choppy due to options expiration on Friday.  

(ZeroHedge)  Despite what is being called "solid" earnings from financials this morning, the initial bounce in their stocks has faded quickly into the red...

However, there is a bigger problem that should be on everyone's radar...

As BMO's Brad Wishak notes, XLF (the Financials ETF) failed almost to the penny at 2007's record highs earlier this year, and has broken down through trendlines since.

As Wishak concludes "one for the radar."

(ZeroHedge)   When we reported Wells Fargo's Q1 earnings back in April, we drew readers' attention to one specific line of business, the one we dubbed the bank's "bread and butter", namely mortgage lending, and which as we then reported was "the biggest alarm" because "as a result of rising rates, Wells' residential mortgage applications and pipelines both tumbled, sliding just shy of the post-crisis lows recorded in late 2013."

Then, a quarter ago a glimmer of hope emerged for the America's largest traditional mortgage lender (which has since lost the top spot to alternative mortgage originators), as both mortgage applications and the pipeline posted a surprising, if modest, rebound.

However, it was not meant to last, because buried deep in its presentation accompanying otherwise unremarkable Q3 results (modest EPS miss; revenues in line), Wells just reported that its 'bread and butter' is once again missing, and in Q3 2018 the amount in the all-important Wells Fargo Mortgage Application pipeline shrank again, dropping to $22 billion, the lowest level since the financial crisis.

(Forbes)  After the first round of bank earnings this morning, Bank of America will be the next big financial company to report, scheduled for before market open on Monday, Oct. 15.

For the third quarter, Bank of America is expected to report adjusted EPS of $0.62 on revenue of $22.67 billion, according to third-party consensus analyst estimates. Last year’s results came in at $0.64 for adjusted EPS on $22.08 billion in revenue.

Lately, interest rates have been front and center for the banks. While a rising interest rate environment for banks can be beneficial, there are challenges if rates climb too fast.