USDJPY is faltering. Recall that it recently tagged the large scale .786. It has been in pullback mode ever since. As I first charted in December 2013, pullbacks from the top of the yellow channel have always resulted in large stock market declines.
The latest, which started around the first of the year, hit a wall — or, rather, a floor. The BOJ has aggressively defended the 101 level — negating the damage to both the red and grey channel damage done over the past several months. Due to the wonders of the USDJPY carry trade, this has put a floor under stock prices as well.
As the rebound off the last bounce off the floor has accelerated, SPX (purple below) has hit new highs.
If USDJPY’s pullback picks up steam, stocks should at least take a pause. Two caveats before shorting anything:
- it would be unusual for it to happen in the last few days of the month
- most pullbacks in USDJPY have occurred in the overnight markets — leaving less of a mark on US stocks, and less of an opportunity for traders to participate.