Charts I’m Watching: May 12, 2014

Why are the futures up 7.50?  Why not?  It’s a POMO day, tomorrow’s Tuesday, and USDJPY … well, it hasn’t tanked.

2014-05-09-ES v USDJPY 60 0613

It sets up a tricky situation for the bears.  If USDJPY’s flag pattern doesn’t play out — i.e. a nice little sell-off to 99.95ish — then the rally will certainly add fuel to ES’s fire.

2014-05-09 USDJPY 60 0613

And, it seems that the BOJ is pretty serious about defending the 101.30 level.  That, in a nutshell, is the rub for bears.

If stock prices are being driven almost entirely by the yen carry trade (they are), and the yen is being propped up by the BOJ (it is), how in the world will any downside momentum ever develop?  It’s the primary reason why chart patterns are blowing up left and right.

There’s no fundamental rationale for upside given the eroding margins, disappearing revenue growth, high margin debt, etc.  And, the technical picture is exceptionally bleak.  Yet, the carry trade marches on, driving prices higher at every opportunity.

Some of the harmonic patterns are playing out.  In fact, ES just completed a  Bat Pattern at 11882.25.  But, the reversals are continually being but short based on the flimsiest of patterns.  So, we’re seeing two steps forward, one step back over and over again.

What will break the cycle?  If the BOJ actually reduces their QQE — declining to expand it was good for a small drop for a few days — or backs off buying equities, it might make a difference (yes, they actually buy equity ETFs outright.)  If Japanese interest rates rose meaningfully, it would definitely make a difference.  If actual war breaks out in Ukraine or elsewhere…ditto.  Otherwise, I’m beginning to have my doubts.

Keep an eye on USDJPY this morning.  The way things have been going lately, it’ll rally just enough to help ES (and, possibly SPX) make a new high (i.e. trash the harmonic patterns and complete an IH&S) and then back off.  The SMA10 is at 102.056.   Follow through has been in very short supply lately.

Stay tuned.

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