Last November, we noted the Dow’s breakout from a long-standing rising wedge and megaphone pattern to new highs following the BOJ’s huge Oct 31 expansion of QQE [see: Nov 20, 2014 update]. It knocked the yen from 107 to 122 to the greenback, thus giving the flailing yen carry trade (and, of course, the Dow) a much-needed shot in the arm — enabling it to rebound from the broken purple rising wedge and go on to new highs.
We set a new upside target for DJIA at 18,274 — the completion of a Crab Pattern based on the 8.6% drop from 17,350 to 15,855 in October. We noted at the time:
The megaphone pattern is severely dented — which was, of course, the whole point of Kuroda’s action. Whether or not the breakout is maintained will be revealed in the coming weeks, and will depend largely on whether USDJPY reverses at 118-120.
As expected, USDJPY spiked to the critical .618 Fib level at 120.11, taking stocks along with it. But, instead of reversing, it went essentially nowhere for several months. Stocks initially sold off sharply after 120.11 was reached, but constant bounces to just above 120.11 kept them from falling too far.
Finally, in early March, USDJPY broke out to above the 120.11 level. DJIA dutifully followed along, reaching our 18,274 target. It didn’t last, however, slipping back below 120 between mid-March and mid-May.
But, on May 26, USDJPY rallied not only above 120.11, but the March highs as well. It enabled DJIA to reach new highs, too (while breaking several chart pattern rules along the way.) As we suspected, this move would also fail.
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