Quick snapshot of the harmonics for the e-minis:

As anticipated, ES has reached the 100-day moving average.  If it behaves as in previous encounters it won’t stop there; it will dip slightly below on the first test — probably the white .382 at 1757.46 after the open.  The SPX needs to tag its SMA100 at 1769ish.  The May 22 1765 high would be appealing, but that would mean breaking the Dec 18 1767.99 low (the rally designed to convince us tapering would be good for the markets.)

As we’ve frequently noted over the past few weeks since Dec 31 [see: The Top?] the rising channel should get fleshed out in any decent sized correction.  Now that it has, the market must decide whether or not a 4.3% decline is enough.

Teetering at the edge of a cliff isn’t so bad if the cliff is a few feet high. But, as we’ve discussed many times (long before it was fashionable, I might add) this cliff is a mile high — thanks to Bernanke and friends.  The degree of panic that has set in over a 4% correction is ample proof of the faith investors have placed in the Bernanke put.

The currency markets turmoil represents a real and potentially devastating threat.  As detailed in our last major USDJPY update [see: USDJPY Dec 27] the S&P 500 has declined anywhere from 22 to 57% the previous three times USDJPY tagged the trend line it recently reversed off.  The market’s future direction should be clear.

Yet, as we’ve seen time and time again, the FOMC, ECB, IMF, the MSM — someone has always swooped in and “saved” the market.  Hence, the view from the crumbling precipice.  I’ll post targets for both the upside and downside cases over the weekend.

to be continued…

Another day, another ramp job.  Will it stick this time?  USDJPY is facing resistance at the red .618 and the red channel top (the channel within the white channel.)  The red channel is the same slope as many past USDJPY sell-offs, including that of 2007-2008.  So, it’ll be interesting to see if it holds.

If it can get back down to 101.74, it’ll complete the right shoulder of a rather large H&S Pattern targeting “ugly on a stick.”

Considering that the initial decline in USDJPY ushered in an 80-pt decline in SPX, it’s probably fair to say another like-sized decline in USDJPY would knock stocks back another 80 points or so.

Will the H&S play out?  I think it’s fair to say TPTB will make a strong effort to defend the neckline.  Extending it to the left, we can see it’s part of quite an important trend line.

It stopped the plunges in late 1999 and early 2005, then failed in 2008 — the fleeting bounce back above correlating with stocks’ Mar-May 2008 bounce from 1256 to 1440, and subsequent plunge to 666 Mar 2009.  A failure to push above it in April 2009

USDJPY pushed slightly above it for a few days, but failed to hold it in May 2013.  It peaked on May 22, as did SPX before plunging 100 points.

SPX recovered, of course, breaking above the trend line again on Dec 18 — the day which shall go down in history as one of the biggest and clumsiest plunge protection efforts ever.  It was the day the FOMC announced the long-awaited and much feared taper.   The PPT turned the initial plunge into a 43-pt gain — just missing the top 20 single day point gains of all time.

The futures — which, if you don’t know by now, is how the market is “managed” — pushed back above the 1.272 extension of the 2007-2009 crash (a critically important line in the sand in its own right) and didn’t look back.  That 1.272 extension, by the way, is roughly the shoulder line on the ES H&S I’m tracking that points to another 84 points of downside.

Will it or won’t it?  We’ll have to wait and see.  A strong push above USDJPY 102.82 could encourage ES up to 1813 or so — fleshing out the larger right shoulder.  While, a plunge back through the neckline at 101.75 should get things going to the downside.

Coming up, targets.

USDJPY and ES have retraced .886 of yesterday’s ramp.  Bulls need these levels to hold, as both are nearing channel support.

But, watch out for SPX’s SMA 100 down at 1766.89.  A new low there, and the ES to the larger scale .886 at 1764.55 could unravel things as stops are triggered.

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The USDJPY is hanging in there still — surprising, given the abysmal durable goods print.  I wouldn’t expect the rising wedge to hold.

The e-minis shed a portion of the overnight ramp, but only to the purple .618 so far.

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USDJPY, having lost the rising white channel as expected, found the purple .236 channel line.  Recall that the rebound of the yen was one of the central tenets behind our last major market call [see: USDJPY update.]

At the time, the pair had reached a TL dating back to 1998.  The previous 3 tags had resulted in drops in the S&P 500 of 22, 35 and 57%.  In addition, Japanese stocks had reached what I believed to be a turning point:

The TOPIX off almost 6% since then, and has found trend line support here at 1229.

In general, the market is due for a retrace, but I necessarily wouldn’t hang my hat on the USDJPY channel line as a catalyst. In fact, this channel has been pretty sloppy. I’m particularly interested in whether the pair can push back above the falling white midline and, hence, the Jan 13 lows.

There is pretty obviously (to me at least) plenty of additional downside, but things could change quickly if the FOMC/IMF/ECB comes to the rescue due to the EM unrest.

This week is a minefield of economic and earnings news, and I’d be very cautious on any position long or short.  As discussed Friday, this week we’ll get:

…new home sales, durable goods, the FOMC announcement, initial claims, advance GPD, consumer confidence, Michigan sentiment and Chicago PMI.  The unemployment report (Wednesday) should be a big boost, as the 1.4 million folks whose benefits Congress just declined to extend will no longer be counted.  The unemployment rate should plunge.

All in all, I think it’s a week best suited for scalping, as I’m not willing to risk my gains from last week’s shorts on the accuracy of my FOMC crystal ball.

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ORIGINAL POST:  5:15 AM EST

USDJPY just confirmed the H&S we were watching.  Target = 100.68.  There’s good horizontal support for it there, as well as the purple channel .236 line.

The daily chart shows the much lower potential.

UPDATE:  6:15 AM

The Nikkei futures H&S pattern targets 14300 near the purple channel bottom.

BTW, for those who were looking at the transports’ divergence as a silver lining — I hate to break it to you.  DTX just completed a large Crab Pattern that should smack them back significantly.

Dip buyers beware.  This will get worse before it gets any better. Art Cashin just said [watch on CNBC] exactly what we’ve been saying since Dec 27:  the yen’s strength (and USDJPY decline) represents a flight to safety — as are lower yields.

Right now, everyone’s talking about Argentina and the Ukraine, but watch for the focus to switch to Asia any minute.

Next week is huge from an economic news standpoint.  We have the new home sales, durable goods, the FOMC announcement, initial claims, advance GPD, consumer confidence, Michigan sentiment and Chicago PMI.  The unemployment report (Wednesday) should be a big boost, as the 1.4 million folks whose benefits Congress just declined to extend will no longer be counted.  The unemployment rate should plunge.

Coming up, downside targets.

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Lots of action this morning. We’re finally getting some real downside courtesy of the yen, which is following our evil plan to the letter.  As we discussed back on Dec 27 [see: USDJPY update] when we posted this chart, the USDJPY’s reversal at the top of the channel would mean trouble for stocks.

The 1st time back in 1998 knocked SPX (above in purple) down by 22%.  The 2nd, in 2000, chopped 35% off SPX.  And the 3rd, in 2007, walloped stocks for a 57% loss.

For my fellow Fibonacci freaks, each of those declines was roughly 1.618X the previous one.  And, 57% X 1.618 is 92%. Still trying to wrap my mind around that one…

Of the catalysts we suggested for a strengthening yen, each seems to be playing out so far:

The BOJ will have to taper.  IMF Managing Director Shinohara questioned the continuation of QE at a seminar in Tokyo last night.  “As long as progress is being made, there is no need for the Bank of Japan to expand its quantitative easing programme.”

Furthermore, the annual limit of QE has already been reached only 9 months into the program.  And, inflation — especially in food and energy — is becoming more noticeable.  As Zerohedge reported yesterday, it’s beginning to dawn on analysts that the program will be wound down.

Flight to Safety.  Troubles continue to mount in Thailand, where violence is spilling out into the streets.  A state of emergency was declared on Tuesday.  The markets are getting increasingly nervous.

Global funds have pulled $2.8 billion out of Thai stocks and $1.4 billion out of Thai bonds since Oct 31.  The baht is tumbling, and stocks are down 12.5% since October.

China Troubles.  The news on China is increasingly negative, with liquidity issues, a large bankruptcy, and declining PMI headlines in the last few days alone.

Japanese Stock Market.   Japanese stocks have topped and are due for a correction.  The Nikkei maxed out on Dec 31, the same as many other indices.  Though it’s still early, the 7% drop (half of which came today) in NKD since then has even the bulls wondering (but, not technical types who know a H&S Pattern when they see one.)

In sum, the yen is taking off as expected.  And, it’s doing a number on the USDJPY, which this morning lost the acceleration channel it’s been in since last October.

Maybe this time will be different, and the reversal off 105.43 won’t do much damage to stocks.  But, I’m much more comfortable being short.  It’s a long way to the bottom of the ridiculously-steep-nothing-bad-will-ever-happen-as-long-as-the-fed-has-our-backs channel, let alone the Fibonacci targets I’m eyeing.

GLTA.

USDJPY is treading water this morning…

…while EURUSD is clinging to the yellow TL/neckline, with plenty of immediate downside.

I’ve been pounding the table for weeks on the EURUSD and USDJPY charts…

And, presented what I believe to be a  compelling chart on Japanese equities last week:

But, the fact is that almost all of the major indices I watch have reached a natural reversal point from a harmonic standpoint.  Many have also completed chart patterns that indicate a reversal is at hand.  To wit…

RUT completed a large Crab Pattern today.

DJIA has still failed to break out after completing a Butterfly Pattern in late December.

NYSE topped out on Dec 31 after completing a double-top.

COMP has almost (98.6% of the way) reached 78.6% of its drop from 5132 in Mar 2000.

XLF recently retraced half of its 85% drop from 2007 to 2009.

The Transports are just shy of completing a Crab Pattern at the 1.618 extension.

SPX pushed slightly beyond its Butterfly top of 1823 in order to accommodate a Butterfly completion in ES — but has yet to break out despite numerous ramp jobs in the after market.

Battling computer issues this morning…  Fortunately, the markets are cooperating (after the usual holiday weekend ramp job.)  EURUSD continues to weaken as expected…

…as does USDJPY.

Once the white acceleration channel fails, things will start happening pretty quickly. 

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