Yesterday’s Fedstravaganza went off as expected, with all the key algo-stoking language left in and no hints of tightening anytime soon.  Key points from our Dec 16 post:

When I start nailing downside and intra-day targets as I have the past two weeks, it’s probably time to expect a massive rally that defies traditional patterns and technical analysis. 

First, it simply can’t be done without the USDJPY’s cooperation… a bounce back above the H&S neckline and .236 would go a long way to erasing stocks’ losses.  And, a move back above the white .618 at 120.11 would essentially guarantee new highs.

Second, rates need to rise.  I know this is somewhat counterintuitive, but stocks have been positively correlated with 10-yr note rates for most of the past year. At no time was this more obvious than in mid-October, when the plunge in SPX (thin purple line below) mirrored the plunge in rates.

Sure, in the longer run, higher rates will undermine corporate profits and the nation’s economy — both of which have counted on ZIRP to balance their books.  But, that’s something to worry about tomorrow, not today.

The somewhat tricky part here is that if the Fed simply raises short term rates, stocks will plummet.  So, they’ll work to steepen the yield curve as they’ve done many times in the past.  Bottom line, the Fed will need to do its part — starting with tomorrow’s statements which I expect will strongly boost stock prices.

Sure enough, USDJPY did it’s part, scurrying back (well) above the H&S neckline.

And the bond market behaved as expected. Short rates remained steady or even dropped a bit, while rates on the long end of the curved ended up higher.  The 10-yr, having bottomed out at our 2.05 target the day before, jumped up to 2.15 and is approaching our first upside target.

SPX responded exactly as expected, leaping 44 points before settling back at the .382 Fib (a good start for any “massive rally.”)

The part we didn’t see coming? The timing of the Swiss central bankers NIRP announcement this morning.  The futures are saying 20+ points, so I’d say our .618 Fib target is looking pretty good.  From Tuesday:

As for key levels, look for resistance at the SMA10 (2040, also the purple .618) and SMA20 (2050.)

UPDATE:  10:00 AM

SPX barely paused at the .618 (and, didn’t pause at the SMA10).  So, we’ll look for a reversal at the SMA20 (currently 2046.84) and count the .618 and SMA10 as support for the first pullback.

Coming up, our updated forecast. continued for members…

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Note: I will be on the road Wednesday and Thursday and will have a tough time posting throughout the day.  The best I’ll probably be able to do is to post after hours, but I will look for opportunities to sneak in a comment here or there.  GLTA.

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SPX maxed out at our 2019 target yesterday, and appears headed for our downside target of the .786 Fib.  From yesterday’s post:

SPX should test 2019 — the previous high and the red channel top.  I’d be mildly surprised if we didn’t get a reversal there — whether or not it eventually breaks out…  Assuming we get a reversal at 2019, what next?  It’s entirely plausible that SPX drops lower and actually tags the .886 at 1996 or even the .786 at 1976.  The 50-day and 100-day moving averages are currently around 2002 and 1988, so that’s a nice cluster of support.

After reversing, SPX went down and dutifully tagged the SMA100.  From there, it bounced to the SMA50 as we expected.  From the 11:30 update:

I think it would be worth trying a long position here (1989) for a good-sized bounce, but with tight stops.  Just watch for ping-ponging, as the SMA50 at 2001.37 is now resistance.

After SPX reversed at 2002, we took a shot at the next leg.  From the 3:20 update:

My best guess is it goes down and tags the .786 to coincide with 10-yr yields slipping a little further (2.05%) and maybe even a dip to or below 117.45 for USDJPY.

The 10-yr note nailed 2.05% this morning. USDJPY has certainly broken 117.45.  If SPX is to hold, USDJPY should get busy backtesting or pushing back above the H&S neckline.

And, the futures have accommodated with a .786 tag.  We’ll see if the cash market follows suit.

UPDATE:  9:32 AM

SPX was right on the money, tagging the .786 in the opening minute of trading.  From here we should get a nice bounce, as long as USDJPY plays along and scurries back to the neckline of the newly completed H&S Pattern (see chart above.)

If there’s one thing I’ve learned from the past year, it’s that chart patterns and Fibonacci levels have been much more effective when the market is being allowed to run.  That is to say, when the “market” isn’t being propped up or forced higher.

And, as I’ve learned the hard way, any serious decline that comes along is only occurring because TPTB have decided to allow it to occur (after they’ve positioned themselves accordingly, of course.)

It won’t always be this way.  Eventually, things will get out of hand as they did in the summer of 2011 (to a point.)  The timing of such an event will be tough to predict — but hopefully not impossible.

When I start nailing downside and intra-day targets as I have the past two weeks, it’s probably time to expect a massive rally that defies traditional patterns and technical analysis.  New targets coming up shortly.

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Because nothing smacks of urigged-ness more than a chart like this…

SPX came very close to Friday morning’s downside target of 1996:

If USDJPY continues to slide or even (horrors!) actually declines, SPX is going down.  In that event, the SMA50 or SMA100 could team up with the .886 to provide a stop at 1996.

USDJPY did continue to slide, and SPX along with it.  SPX dropped 33 points to 2002.33, just missing the SMA50 at 2000.75.

The small red channel from above in more detail:

In an unrigged market, SPX would continue down and tag the .886 or even .786.  But, futures are pointing 16 points higher at present.  As usual, it will depend largely on USDJPY.

USDJPY moved lower into the weekend, but it was a higher low than seen earlier in the week.  And, the pair is back above the purple .886.  It was enough of an improvement to help boost futures. But, USDJPY is in a triangle until we get either a breakout or breakdown.

SPX should test 2019 — the previous high and the red channel top.  I’d be mildly surprised if we didn’t get a reversal there — whether or not it eventually breaks out.

I’d also keep an eye on the e-mini’s 50-period moving average on the 60-min chart (purple, below) — a fairly accurate short-term indicator lately.

Assuming we get a reversal at 2019, what next?

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Crude light paused at our .618 target of 62.65, but has since continued sliding. Recall that this was supposed to be major support as the chart from a few days ago shows.

The fact that neither the channel nor the .618 Fib held is quite bearish.  The next Fib support isn’t until the .786 at 49.17, followed by the .886 at 41.14.

If we don’t adjust prices to reflect contract changes, the levels are 50.67 and 42.41 respectively.  Either way, we’d want to continue to be short.

I see no other channel, moving average or chart pattern support  In fact, the daily RSI just fell through its support.

We can argue that CL is oversold, but I see very little to prevent it from becoming more so anytime soon.

Yesterday’s dramatic moves were certainly In keeping with our call for a choppy end of the year.  Our initial read on the situation proved fairly accurate:

Look for an initial strong move back to the red channel top (2049ish) and, if momentum can be maintained, the red TL which is conveniently located at the .618 (2058.38) of the latest decline.

In fact, SPX paused at 2049, reversed a bit, then shot up to 2055.33 to tag the red TL before reversing hard and closing at a 9-pt gain.

Taking a step back, it’s fair to say we’re getting a somewhat normal reaction to a reversal at the 1.272 — even though the 1.272 “tag” was anything but.

The index made initial contact on Nov 25, only to go on to close even higher over the next two sessions.  It finally backed off by 25 points, but was saved by the red TL and went on to post four more new highs in excess of the 1.272 before finally giving up on Dec 8.

Since then, it’s been a battle to maintain some connection with the rising red TL.  The connection turned bearish yesterday: a backtest.  The normal next step would be lower prices.  And, as the futures are indicating, that’s exactly what we’ll get at this morning’s opening.

With ES pointing to a tag of the previous high, we should expect SPX to follow suit.  We’ll call 2019.26 our initial target.  Astute readers may recall this target from this past Tuesday [see: Dec 9 Update]:

USDJPY has reached a TL of support (purple, below) so we’ll watch to see if it gets a reversal here that allows SPX to bottom out at 2041 (the 1.272).  If not, SPX’s next support isn’t until 2031 (1.618) and then the previous high way down at 2019.

USDJPY got that initial bounce, and another than enabled yesterday’s intra-day spurt. But, since then, it has been no help at all to SPX — not even managing a backtest of the broken rising wedge.

A break through the dashed red line, and especially the white channel midline, would do the trick.  But, bulls should keep an eye on that white channel.

It’s not much of one yet, but USDJPY has a habit of converting a long, sideways slide into a lower-bound tag.  If so, it could provide additional boosts to stocks that are seemingly out of the blue.

As to SPX, let’s review the basics of 1.272 tags.  1.272 is the square root of 1.618 — the golden ratio.  This makes it important, and it quite often provides decent reversals.  The most dramatic ones come when there’s an previous reversal at the .786.  We call these Butterfly Patterns [read more about Butterfly Patterns HERE.]

As can be seen from the SPX charts above, there was no reaction at the .786 (or, at any other Fib level for that matter.)  That doesn’t preclude a significant reaction at this 1.272; it merely doesn’t suggest one.

So, while a Butterfly Pattern reaction might normally reach the .886 or .786, I wouldn’t pin my hopes on it this time.  Again, it doesn’t mean it won’t happen.  If USDJPY continues to slide or even (horrors!) actually declines, SPX is going down.  In that event, the SMA50 or SMA100 could team up with the .886 to provide a stop at 1996.

But, as always, the key will be USDJPY, and whether it can continue skyward.  Given the latest out of Japan regarding the GPIF’s ludicrous equity investments, I think it will — keeping our year-end forecast alive.

UPDATE:  10:40AM

A mixed bag so far…   USDJPY did, indeed, break through the TL.  It even broke through the white channel midline.

But, it reversed back below it, indicating 6 more weeks of winter — or, we’ll get that 2019 tag — whichever fits.  Judging from SPX’s chart, probably the latter.

UPDATE:  EOD

Pretty wild day.  USDJPY couldn’t punch through the white midline, and looks like it might have more downside ahead.  But, as with all prices that are set by a committee rather than the markets, we’ll have to see what the BOJ has in mind.

Just eye-balling it, though, the falling red channel argues for further downside — as does the rising purple channel that mostly looks like a flag pattern.

As a result of USDJPY’s weakness, oil’s weakness and lower interest rates (TNX fell to 2.08%), SPX fell through our 2019 target and came awfully close to the 50-day moving average.

I’ll revisit the year-end picture this weekend.

 

Today’s post will be brief, as we’re experiencing our first winter storm on the central California coast and the power just went out.

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As we expected, USDJPY reacted at the large, rising white channel’s midline — reversing higher and dragging S&P500 futures along. From yesterday’s 3:50 PM update:

USDJPY did, indeed, seek out the white channel midline — tagging it at the red .886 (117.70 vs our 117.75 target.)  We should see support here, meaning a potential bounce for SPX as well.

A few minutes ago, however, it reached small scale trend line resistance (red, dashed) and will need to push through in order for equities to bounce much higher.

SPX closed at a low point yesterday, which over the past year has generally been a head fake.  Indeed, futures are currently pointing 8 points higher — a move that will continue if and only if USDJPY can push through the above-mentioned resistance.  It should.

Look for an initial strong move back to the red channel top (2049ish) and, if momentum can be maintained, the red TL which is conveniently located at the .618 (2058.38) of the latest decline.

In yesterday’s post “A Tipping Point,” we discussed the need for yields to rise in order for the rally to continue.  ZN (10-yr note price) reversed at the same time as USDJPY and is this morning trying to decide whether to continue the decline (which results in higher yields.)

Like USDJPY, it needs to break through in order for the rally to continue.

TNX (10-yr yields) have found support at the red channel line, and conversely need to rebound in order to boost stocks.

VIX also has a good start, back into the small megaphone pattern that’s been setting up for the past two weeks.

I’ll post more later if/when power returns.

UPDATE:  4:50 PM

Pretty impressive run up to the red TL as expected.  The reaction there was almost as impressive, giving up more than half of the earlier gains.  I’ll post more in the morning, but here’s a little food for thought re USDJPY.

The floor we talked about yesterday has been established (the red, dashed line below.)  Now, we’ll see if it can hold.

 

One week ago today, we wrote [see: Update on Currencies] about the chop we expected prior to the end of the year.

Gaining 65 points in 20 remaining sessions means a lot of chop between now and then, so we could see some wild swings.

We listed five targets we expected to be hit in the next several weeks: USDJPY, EURUSD, DX, VIX and ZN.  Of the five, two have triggered so far: USDJPY and EURUSD.  And, DX appears to still be on track.

VIX and ZN, however, are staging a mutiny — threatening our year end target for SPX.   10-yr note yields are testing their Dec 1 lows…

…and, VIX has jumped back well above the purple channel bottom — rising almost 25% just today. One additional concern for the market is oil which, as we noted yesterday, needed to hold 63.72 in order to hold major support.  It didn’t, plunging below the white channel bottom today to as low as 60.43.

As the financial media is finally reporting, there are serious implications for highly leveraged energy companies and the banks that service them — not to mention a 93% chance (according to its CDS) that Venezuela will default on its debt.

And, as was barely reported by the MSM, the likelihood that the ECB is about to trot out some QE of its own has been greatly overstated according to a leak from within the EU.  Zerohedge covers it HERE.

Needless to say, if the BOJ and FOMC are both tapped out, the ECB is the last major central bank that can keep the QE party going.  If it’s unable to make a contribution (as I believe it is) then profiting from carry trades is going to get a lot tougher.

GLTA.

 

 

USDJPY, after reacquiring the purple TL and thus providing the stick save SPX needed yesterday afternoon, stumbled again overnight.

It just goes to show how essential a falling yen (rising USDJPY) is to higher stock prices.  Futures were off as much as 6.25 a few hours ago, but are — for now — safely above their version of the rising red TL.

Unlike SPX, yesterday’s bounce came close enough to call it a tag on the .618.  So, we can legitimately call the overnight weakness a corrective wave.  The only hitch now is whether or not USDJPY will play along.

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From this morning’s initial post:

USDJPY has reached a TL of support (purple, below) so we’ll watch to see if it gets a reversal here that allows SPX to bottom out at 2041 (the 1.272).  If not, SPX’s next support isn’t until 2031 (1.618) and then the previous high way down at 2019.  Key support levels for USDJPY are the SMA10 at 119.239 and the purple .886 at 118.59.

USDJPY rebounded just past the .886 at 117.95, prompting SPX to level off just shy of the 1.618 at 2034 (hey, if rigging markets were easy, everybody would do it!)  From here, the next steps were somewhat predictable.

The first challenge is to get back above the red TL and regain the rising channel.  It should be the next move after SPX bottoms out this morning, and will probably present itself as a backtest initially.  This would normally be a negative development — setting up further losses.  But, a push back above the red TL is more likely — either later today or tomorrow.

SPX gained 23 points to backtest the red TL, whereupon it fell six points before taking another shot.  It pushed above the red TL late this afternoon for a 26-point pop off this morning’s lows.

After being down by 26 points earlier, SPX closed off 0.49 on the day.  After such an impressive recovery, why not another half point to close green?

Simple.  By closing below the .618 at 2062, it leaves open a significant upside target to rationalize the next leg higher.  Had SPX tagged the .618 during the day, sellers might have shown up to push prices back below the red TL.

Just as importantly, by reaching 2060.60, SPX closed the huge gap that would have otherwise been left in the wake of this morning’s sell-off.  Instead, traders are left wondering whether the recovery was merely a rebound/gap fill or the start of another leg higher.

For the Masters of the Universe and their un-rigged market: Mission Accomplished.