As we discussed last week, the Street needs a big, positive close at the end of the year.  It’s great publicity, boosts bonuses and gives banks an opportunity to offload some of the crap still on the books.

It presents a quandary, as numerous reversal signals have been generated by harmonic and chart patterns.  What’s the big picture say?

The charts to which I keep coming back are the currencies.  And, the one that promises the most mayhem is the USDJPY — which has done a remarkable job of forecasting equity moves — particularly since the Oct 2011 lows, when the Fed first started yakking about QE3.

We all know that QE = risk on. So, why has the dollar soared in the face of successive rounds of QE?   Doesn’t QE weaken the dollar?

It does, but the damage is nothing compared to the carnage being suffered by the yen, whose QE is massively greater on a relative scale.  Japanese QE = (risk on)ⁿ.  This is why bulls should be incredibly careful about chasing this equity rally.

In fact, based on the 20-yr USDJPY chart, there’s a very good chance that the pair is about to tank.  If it does, there’s a very good chance it’ll take stocks with it.  The chart below shows what happened the last three times USDJPY tagged the yellow trend line from 1998.

Note that the pair made new lows beginning in July 2011 and running through October 2012.  From a harmonic standpoint, the yellow grid is still very much in force.  The previous yellow TL tags have produced declines of 31%, 25% and 39% in the pair.   If the pattern repeats when the pair tags the TL for a 4th time, an average (32%) drop would land the pair at around 72 — a new low.

The bigger concern for equity markets, however, is what has happened to SPX when USDJPY tagged that trend line in the past.

to be continued…

 

Another exciting day of watching the market being propped up.  Nothing new from yesterday, really.  Here’s the action on the eminis today:

The Eminis are (hopefully) about to bag their own Butterfly Pattern.  It’s been an obviously “managed” march higher, with very few wiggles in either direction — not exactly the sort of market one encounters “in the wild.”

SPX, which reached its own 1.272 last Friday, is closing in on a little Crab Pattern just for grins.

As detailed last week, DJI already met its objective last Friday.

RUT reached its on Monday.

The USDJPY is a stone’s throw from the .618 retrace and trend line detailed in this morning’s post.

The dollar is poised to surge, at least short-term.

Though, the longer-term picture will depend on the response from Japan and the eurozone.

VIX put in a nice bottoming move today.

And, the 10-year traded over 3.0% today — topping the September highs (though a move lower on the fear trade is still a  good possibility.)

Gold is about to make a new low following last July’s premature bounce.

I could go on.  But, the bottom line is that just about every index and instrument I follow is at a turning point.  As we’ve discussed many times before, this is not a guarantee that markets will tank overnight.  There are huge, moneyed interests that will obviously throw everything they’ve got at this market in order to preserve their gains/prevent any losses — if it suits them.

With a big fat gain in the books for 2013, their bonuses are secure.  They can afford to let a little air out (after positioning themselves, of course) and reset sentiment, breadth, etc — again, if it suits them.

Those who aren’t members of TPTB (including yours truly, quite obviously) might take the opportunity to book gains and raise cash in the event we get any volatility at all in the next few sessions.  But, I’m certainly not expecting a steep plunge overnight (wouldn’t mind it, though.)

After that, though, things might get very interesting.

A good friend recently asked me if I was feeling better about the economy, given all the positive news.  Hardly.  Much of the good news is more fabricated than ever.  Most of the rest is the by-product of the enormous amount of cash still being pumped into the markets.

Insurance companies, pensions, banks (especially banks) and 1%’ers around the world have to put all that cash somewhere.  As long as the markets don’t fall apart, they’ll stick to their asset allocation models.  If the markets burp, enough will step to the sidelines that we’ll get a nice little correction.  If the markets do more than burp, the downside potential is huge.

We have plenty of potential catalysts.  My favorite is the derivatives market.  Last I looked, it was up to around $800 trillion dollars, though I’ve been told it’s now closer to a quadrillion.  How often do you get to use a word like “quadrillion?”  These are mostly contracts between banks and others to limit exposure to interest rate and currency swings.

The first problem is the size of the market.  The second problem is the size of the market relative to the capital of the banks whose guarantees are on the line.  The third problem is that banks aren’t required to detail their holdings in their financial statements; a simple “don’t worry, it’s all hedged” is about all you’ll see.

The final and most serious problem is that these obligations have been sliced and diced so many times that no one really knows what might happen if a sizable player goes belly up.  We’ve been conditioned to think the Fed and/or ECB will come to the rescue, but what if circumstances prevent it.  What if a battle breaks out over who’ll eat the losses?

I believe that a replay on the scale of mortgage derivatives and Lehman is not only possible, it’s somewhat probable.  What if the London Whale’s $8 billion loss in derivatives was not an outlier?  What if it was the tip of the iceberg?  What if it’s most of the banks in Southern Europe this time?  Or, China?  Woudn’t that be fun?

I realize that such a negative economic viewpoint makes me sound paranoid. Maybe TPTB will stick the landing just right.  Maybe when the music stops, there will be extra chairs available.  Maybe this time will be different.  I sincerely hope so.  But, until I start sleeping better at night, I’ll continue to look for reasons to short this market — and, hope that it proves me wrong.

Stay tuned.

 

In our May 29 update on the Nikkei [see: HERE], we noted the index’s reversal at the .786 and theorized about a drop to 13,112 or even 12,343 as a result.  The actual decline clocked in just a tad lower at 12,310.

Now, the Nikkei is coming up on a Bat Pattern completion at 17,068. Given the steepness of the rising third wave, even a mild .382 retracement would knock the index back by 20% or so (13,500ish.)

A close-up shows the overlapping Butterfly Pattern also completing at about 17,000.

One would expect such a decline to correspond with a reversal or at least a slowing of the bloodletting occurring in the yen.

So, it’s interesting to me that the USDJPY is approaching the pivotal .618 Fib retracement at 105.57 and the trend line that has smacked it down by an average of 33% the last three times.

There have been times when the pair’s weakness (yen strength) moved counter to US equities.  But, since 2012, it’s been a match made in heaven (or at least the Eccles Building.)  But, contrary to Bernanke’s and Abe’s assertions, what goes up…

In case you’re wondering, the previous reversals at the trend line corresponded with declines in SPX of 19%, 31% and…ouch… 57% (the thin purple line below.)

BTW, that .618 retracement in the USDJPY is of the drop since the 2007 highs.  SPX, of course, recently completed a 1.272 extension of its drop from its 2007 highs.  The fact that they’re occurring at the same time raises the stakes for stocks.

If USDJPY reverses as expected, look for it to retreat to at least the channel bottom at 99.84 and drag SPX back below its 1.272.  Otherwise, we could be off to the races.

Stay tuned.

Harmonic Patterns aren’t perfect. But, when this many of them line up, all screaming the same warning, it makes sense to pay attention. In no particular order…

SPX has completed a large Butterfly Pattern.

DJIA has completed a large Butterfly Pattern and tagged the channel top that connected the 2000 and 2007 tops.

RUT has completed a large Crab Pattern from 2007, and another from the 2011 highs.

Transports are nearing a Crab Pattern completion.

AAPL has completed a Bat Pattern and is near a .618 retracement of its drop from 705.

The Nikkei 225 just completed a Bat Pattern 7 months in the making after reaching the .786 retrace of the drop from 2007.

The EURUSD has completed a Crab Pattern and Bat Pattern after reaching the .618 retracement of the drop from May 2011.

Gold is testing its June lows.  It should bounce here, with Fib/SMA targets at 1277, 1307, 1337 and 1380 before it breaks down to 1155.

And, interest rates are rising — but, are ripe for a sharp fear-induced reversal.

AAPL’s rally from 385 likely represents a backtest of the broken red channel within the larger white channel.  It recently reached our target [see: Aug 19 Update] on Dec 5, a little behind schedule.

The white Bat Pattern completion seems to suggest sell the China Mobile news, while the potential for AAPL to reach the yellow .618 argues otherwise.  The rising white channel nested within the top 25% of the larger white channel also suggests a reversal here at the yellow .618 or white .886.

As noted in August, AAPL failed to extend further than the .618 Fib level many times on the way down from 705.  Could this be another terminal .618 tag?

Whether this is the final thrust or the precursor to a Gartley Pattern completion at 636 remains to be seen.  But, without a new high here, we could easily see a backtest of the broken falling purple channel at a typical .618 retrace (of the rise from 385) at around 460ish.  Even a mild .500 retrace indicates 480.

Bottom line, the breakout of the falling purple is undeniably bullish.  Though I remain constructive on the stock, we could get a 15% correction before it advances any further.

Good luck to all.

Don’t look now, but the Butterfly Pattern generated by the drop from 1576 in October 2007 to 666 in March 2009 is a handful of points from completing.  We’ve discussed this target for over a year [see: The World According to Ben.] It’s hard to believe it’s finally here.

Will we get a 1973-style response [see: Butterfly Warning] or something more muted?  Will the same knuckleheads who tried to portray throttling back the Fed’s magical money machine as a good thing pull out all the stops…again?

The caveats:

• SPX probably won’t stop at 1823.42 on the dime; that rarely happens
• at 1823, it’s already plenty close enough
• it could overshoot 1823 a bit; 10 points is a common margin of error
• TPTB could keep things going and bust right through 1823 if they so choose
• even if this proves to be an important top, it won’t necessarily plummet

I’d be comfortable taking a short position right here at 1817, as the purple channel seems to offer good nice resistance at the white channel intersection. But, it’s a steep channel, and SPX could continue bumping up along the underside of it for the rest of the day, easily tacking on the extra 6 points.  I show the top of the purple channel intersecting with 1823 at around 3:15PM.

The red channel is from a couple of weeks ago based on several similar previous channels.  But, the purple channel has almost as strong a pedigree.

ES is also a few points from a pattern completion — a Crab Pattern on a much smaller scale.  Its Big Butterfly is way up at 1837 and obviously wouldn’t be reached during regular market hours if SPX does reverse at 1823.

Furthermore, the DJIA Big Butterfly is still a few points away: 16,300 versus its current 16,250.

UPDATE:  2:00 PM

SPX just tagged 1823.42.

In fact, the global market targets we posted about a month ago [see: Around the World] have generally been reached:

 

Index	Nov 20 Target	Result
Nikkei 225	15,597	15,870
FTSE 100	<6875	<6875
NYSE	10,239	10,229
SPX	1823	1823
DJIA	16,300	16,286

 

One indicator I look at in various time frames is the RSI.  I don’t care so much about the actual value, but how it moves in relation to past moves.  I discovered a long time ago that, just like prices, its movements often form channels.  It’s a little like reading tea leaves or throwing monkey bones, but it works for me.

Note how, on the 60-min RSI chart for SPX, the swings in RSI followed the rising purple channel to a point, then switched over to the falling white channel.  In the midst of the transition, a new channel has been established – shown below in red.

If SPX reverses at 1823 as I expect, RSI will fall back below the top of the red channel and confirm the downtrend.  We can watch its progression relative to the purple, white and red midlines.

What’s really interesting to me, however, is the daily RSI chart:  The rising white channel is pretty obvious, and has been consistent with the series of higher lows in SPX.  No divergence here.

But, consider the peaks in RSI.  As seen below, they can be connected with a falling channel line.  The prices are rising, but the relative strength is falling.  This, of course, is marked negative divergence — and, it has been known to spoil more than a few bullish parties.

Here’s the same chart with prices.  Note that it’s not the tag of the yellow channel top that’ll kill a bull market.  That just gets the ball rolling.  It’s the subsequent falling channel — usually around the 5th tag or so.  And, if a peak should fail to even reach the trend line, such as July 2011 at 1347 — watch out below.

Here’s a close-up of the past year.  Note that RSI is currently bumping up against the white channel midline, the purple channel top (arguably a little ragged) and the red channel top — all at about 5 tags of the red channel top after the yellow top tag at 1729.

If you’re a bull, this is a good reason to lighten your load.  If you’re a bear, this is a good reason to get very, very short — especially in light of the biggest Butterfly Pattern completion since 1973.

Not that there are any similarities or anything…

Anyone happen to notice the nice bottom in VIX yesterday and today?

I’ll update several more charts over the weekend, but here’s a little taste…a nice juicy Crab Pattern in RUT.

Have a great weekend, everyone.

 

 

I suppose yesterday would rank right up there as one of the more impressive dip buys ever.  It was not, as the talking heads would have you think, the market’s acceptance of the taper as no big deal.

From yesterday’s Bye-Bye Ben:

My expectation?  Whether they taper or not, TPTB are standing by with buckets of cash to buy any dips that appear.

And, that’s exactly what they did — the better to sell investors on the idea that everything’s just fine, that the market won’t miss that $10 billion/month or any amount they decide to taper.

Just in case the message didn’t get through… today’s a big POMO day.  Trade safe.

*  *  *  *  *

The futures are digesting some of yesterday’s gains.  Looks like we have most of an A-B-C with the B and C of the C leg maybe down to 1790ish?

While the dollar is following the path we laid out with uncanny precision.

continued for members… (more…)

Finally, the day we’ve all been waiting for.  Will they or won’t they?  Who knows?  But, it’s pretty clear, from watching the talking heads over the past few days, what the script is:  bring on the taper, but paint it as a non-event because the economy is strong enough to take it.

We can argue about whether the economy really is that strong, and whether inflation is an issue.  But, there’s little argument that today’s decision will impact the markets.  My expectation?  Whether they taper or not, TPTB are standing by with buckets of cash to buy any dips that appear.

If you’re a bull, I wouldn’t worry so much about an immediate sell-off (though stops are always a good idea), but I would be concerned about what the market does after the cash infusion spike — especially if SPX tags 1823.

Tomorrow’s a big POMO day.  But, there’s more to worry about than just tomorrow.  As always, I’ll trade where the market is going, not where it should go.

US equity markets are relatively quiet this morning, settling a bit after fleshing out a triangle as expected.

The USDJPY is retreating after hitting channel resistance in this post new-high week.

While, the dollar looks like it could break either way — probably sinking, then soaring.

Yesterday, VIX tried to break out of the white channel but fell back in line.

UPDATE:  1:53 PM

Should get the announcement in a few minutes…  Do or die time.  Some targets in either direction…

The close-up:

continued for members… (more…)

Despite yesterday’s overnight dump and subsequent rally, the path to the Butterfly completion is still very much intact.  Though, it bears repeating (the 50th time?) that we might have already seen the top last week at SPX 1813.

continued for members… (more…)