Trick or Treat?

If you’re just checking in and wondering why the futures are up over 20 points this morning, last night the Bank of Japan, in a 5-4 vote, increased its annual QQE target from 60-70 trillion yen to 80 trillion.

This means that the BOJ is now buying every single bond that it issues — also known as monetizing its debt.  Aside from the fact that it is bizarrely legal, this is no different from printing out hundred dollar bills on your Xerox machine with which to pay your bills.

The USDJPY, which three weeks ago fell out of the rising purple channel that ramped it from 101 to 110 in two months, has reached 111.97 so far.  It has not only broken out of the secondary red channel, but is backtesting the original purple channel midline.

This is a shocking development, given that Japan’s QQE has been an utter failure — other than its ability to inflate other asset bubbles around the world. Note, below, the impact on S&P 500 eminis when USDJPY lost the purple channel — and the huge bounce in ES when USDJPY started recovering.

2014-10-30 USDJPY v ES daily 0600Interestingly, this leaves USDJPY at the .500 retracement (111.55, the new key price level) of the drop from its 1998 all-time high of 147.55 to its lows of 75.56 in late 2011 — when Kuroda/Abe cooked up the rescue scheme.  So, it’ll be interesting to see if there’s any follow-through, or the pair has simply exchanged one form of resistance for another.

2014-10-31 USDJPY v ES daily 0600Surprisingly, DX has not rallied all that much, and is still stuck at the midline of the rising yellow channel we’ve been watching for over a year.

2014-10-31 DX daily CUThe close-up shows DX has reached the 1.272 Fib level, with the white .886 just above in case we get a break out.2014-10-31 DX dailyThe 10-yr has also not reacted much, with prices holding above Wednesday’s lows at the .618 Fib level we discussed then.

2014-10-31 ZN dailyAnd, VIX just tagged the .886 retracement of the rally from 11.52 on Sep 19 to 31.06 on Oct 15.  2014-10-31 VIX daily

Note the well-formed falling wedge on the 15-min chart.

2014-10-31 VIX 15-minI should also point out that the Nikkei 225, which has risen 1,160 points this past week, is onlly 48 points away from its .886 Fib retracement of its 2007 highs. It’s close enough to count, though I suspect the fact that it didn’t quite reach it (which would have been quite simple for TPTB) is often an indication that the fireworks aren’t quite over.  Either way, it points to an imminent reversal.

2014-10-31 NDX wkly 0900For all these reasons, I would hesitate to chase this rally, as there is a fair to middling chance of it reversing.  The brave/reckless might even consider shorting ES (albeit with tight stops) here at 2014.

I’ve said it before, but it bears repeating.  It’s time central bankers admit that currency debasement has absolutely nothing to do with helping their countries’ citizens.  There is no proof whatsoever that the average guy on the street benefits from increased inflation.

Japan, like the US, uses a measure of inflation in its official statements and press releases that leaves out food and energy prices.  Guess why?

As of September — before this latest yen bashing — fresh food prices had increased 23% in the past year.  They were up over 10% in the past two months alone!

Screen Shot 2014-10-31 at 6.49.03 AMEnergy prices to the Japanese consumer increased 18.5% since the yen topped out at 75 USD.  By contrast, oil prices in dollar terms dropped 22% over the same time period and should drop substantially more by year-end.

Screen Shot 2014-10-31 at 6.52.26 AMThe experiment that is quantitative easing has failed the Japanese people.  When will they wake up and realize that things are going from bad to worse?  When will the rest of the world realize that their own central bankers are taking them down the same path?


UPDATE: 10:50 AM

ES dropped from 2014 to 2002.25, a pretty good move so far.  DJIA and ES made new highs, and the fact that USDJPY keeps edging higher suggests SPX will, too (2019.26 versus 2015.16.)  SPX can do so without ES retracing all its decline off the top.  If it does (and, that’s a ginormous IF) ES could be angling to complete the pattern below.  If C=A, we’re looking at 2001.  At 1.618 of A, more like 1991.

2014-10-31 ES 5min 0749The nearest daily moving average is the 50-day way down at 1960.  The 10-day will likely reach it on Monday.  For SPX, the SMA50 is 1968 and the 10 will reach the SMA100 Monday at around 1963.  I like moving average crosses as targets for pullbacks, but till readily admit that these are miles away and, as such, would necessitate a huge reversal.




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