On Dec 1, Crude Light Oil came close to but didn’t quite tag the .618 we’ve been watching.

Our Fib grid had been placed slightly off.  Today marked a solid tag, meaning we should now get the significant rebound we’ve been expecting. A sustained drop below the white channel bottom, on the other hand, would be extremely bearish and a clear signal to short oil.

SPX dipped slightly lower than our 2055 target yesterday, reversing at 2054.27 before a lackluster bounce that reached 2063 before petering out.  From the Dec 5 Update:

With USDJPY overshooting the .618 to tag the channel top and a small scale 2.618, I wouldn’t be surprised to see its rally fizzle here and SPX drop back from 2077 to set up for some of that chop we’re expecting. Any significant downside should be constrained to 2055 — as the SMA20 is about to cross the red TL connecting tops from the past several months.

With the futures currently off nearly 20 points, the red TL is certain to fall this morning.  Why?  As we mentioned, SPX would continue to hold its channels if USDJPY could hold its rising wedge — which just broke down overnight.

ES is in need of a stick save.  And USDJPY has usually obliged.  But, China is selling off dramatically at the moment, and there’s a lot of money running for the hills.  For Japan, that means money flowing back into the yen which, when it strengthens, sends USDJPY lower and rattles the yen carry trade.

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.  Coming up, expected moves for the next few days.

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The EURUSD tagged our 1.22635 target from Dec 3 [see: Update on Currencies] overnight, leaving just three more year-end targets to reach: ZN, DX and VIX.  Note that, like most other coincident indicators, EURUSD prices have diverged from SPX (thin purple line) — particularly over the past six months.

Following news that Japan’s Q3 economic contraction was even worse than originally thought (-1.9% versus -1.6) the USDJPY has also sold off — down .50% so far.  Incredibly, a Japanese government spokesman was immediately in the news saying that “the economy continues to gradually recover.”

USDJPY, along with VIX [see: Our Unrigged Markets] provided the usual closing bell boost to equities Friday afternoon, and is now leading futures lower (-6.5 at present.)

SPX reached a little higher (2079.47) than we expected Friday before turning around and sliding toward the close.  The above-mentioned last second manipulation by USDJPY and VIX saved it from a red day.

With USDJPY overshooting the .618 to tag the channel top and a small scale 2.618, I wouldn’t be surprised to see its rally fizzle here and SPX drop back from 2077 to set up for some of that chop we’re expecting. Any significant downside should be constrained to 2055 — as the SMA20 is about to cross the red TL connecting tops from the past several months.

If USDJPY can hold the rising wedge lower bound, SPX should hold the small white channel.  If not…

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So, you’re sitting at the Citadel trading desk, minding the Fed’s your own business, planning your weekend, when alarms suddenly start ringing. You glance up and notice the market is in danger of closing in the red for the day.  Not good!

You scan the monitors, and sure enough, VIX crept back up above last week’s lows!  Jinkies!

Fortunately, you have at your disposal the ability to turn it all around in a jiffy with just the click of a mouse.

A few seconds later… VIX monkey-hammered by 5.3%, SPX closes up 3.45 on the day.

The universe is safe for democracy.  The American way of life is preserved for at least one more weekend.  Time to celebrate!

AUDUSD has reached a potentially important channel line at an overshoot to a Fib reversal point (the purple .886 below.) While the USD has been on a tear lately, we are looking for it to take a breather.  So, a little rally here for AUDUSD wouldn’t be surprising.

There was a nice reversal at the purple .786, so ultimately we should consider the possibility of a Butterfly Pattern to the purple 1.272 intersecting with the white .786.  It just doesn’t jibe with the rising white channel bottom, so that might be a stretch.

IMHO, the big picture focuses more attention on the yellow .786 at .747 as the end of the reaction following the huge Crab Pattern completion — though a backtest of the previous high at .821 is the obvious bullish roadblock.

Like just about everything else (except USDJPY), AUDUSD lost its positive correlation with SPX in late 2013 when central planners led “markets” down the rabbit hole.  It’s hard to know when/if this will change, but it’s worth checking in from time to time.

A close-up:

It’s been a while since we looked at XLF — partly because it’s one of the most frustrating examples of central bank planning obliterating chart patterns and harmonics which are normally highly predictive.  I suppose it’s to be expected, as no sector has benefited from the Fed’s largesse as much as financials.

At the end of 2013, when the purple rising wedge and two different Fib levels indicated a significant reversal, XLF did just that.  It coincided with SPX’s dip back below the significant 1823.

But, like SPX, it was rescued by the Fed, ECB and BOJ and was suddenly back in the rising wedge and seeking higher highs on the back of a new TL, shown above in red.

It lost that TL, too, in the August 2014 mini-correction.  Wouldn’t you know, it popped back above, only to really melt down in the Sep-Oct near-correction of -9.75%.

For those who don’t live and breathe chart patterns, losing a trend line is supposed to be a big deal.  It’s not normally as easy as the past year has made it seem.  But, then, nothing about the bubble-blowing central bank reinflation of “markets” is terribly normal.

Now, safely back above the red TL, XLF is approaching several Fib levels that would, in an unrigged market, matter.  I point them out in the off chance that TPTB let a little air out after the end of the year, and because it gives bulls something to target as they BTFD.

The most important is theoretically the white .618 at 25.82, which intersects with the white channel .25 line around year’s end.

Yields on the 10-yr have bounced strongly since it reached our reversal target on Monday [see: CIW Dec 1.]  Today, TNX tested both the 20- and 50-day moving averages and are probably ready for a breather, if not outright reversal.

We got the reaction we were expecting, with SPX having backtested the TL and up to 2077 as of this morning.

The end result should be that SPX closes back above 2055 (but, below the SMA5 at 2065 after setting a record last week) in order to back test the red, dashed TL connecting the Jul 24, Sep 4 and Sep 19 tops.

As we look for signals of the chop that should develop between now and year-end, this is a pretty good one.  I wouldn’t be surprised to see a pullback to 22.18 to close the last gap or even 21.80 to tag the bottom of the developing triangle.

If I’m wrong, the SMA100 is just above at 23.93.  But, I don’t think equities are ready to break out just yet.

Futures were all over the map following this morning’s jobs report.  ES spiked to 2077, plunged to 2068.50, then shot back 2073.50 where they look to open green by 1.50.  It was all courtesy of the USDJPY, which has now not only popped above the white .618 but backtested it as well.

The beat was so strong that it, again, raises the question of why ZIRP is still with us if jobs metrics are so important to the Fed.

The dollar continues toward our year-end target, solidly above the purple .886.  Likewise, 10 year notes. The EURUSD again came very close to our 1.2263 target, bottoming out at 1.2278 — probably close enough for anyone wanting to take a shot at a bounce but not quite there.

Balance of trade, barely mentioned anymore by the MSM, missed estimates of a bounce higher (less negative) clocking in at -$43.4 billion rather than the -$40.0 billion forecast by Briefing.com.  As we discussed two days ago [see: Update on Currencies], this is hardly a surprise given the USD’s strength.

Looking ahead for the day, SPX should continue to trade above the white 1.272 and VIX to test 11.91.  But, keep an eye out for Factory Orders at 10:00 EST and, especially, Consumer Credit at 2:00 EST.  And, as always, watch to see what happens with USDJPY and DX reaching important inflection points.

SPX opened up a few points and seems content to remain in the small purple acceleration channel that points directly at our year-end target of 2138-2142.

Intra-day, keep an eye on VIX and the previous low of 11.91.  If it slips below, we should expect new highs on SPX/ES.  In contrast, however, USDJPY and DX are bumping up against the top of their acceleration channels — meaning stocks might not get much more support before a reset.  So, traders might want to keep stops fairly tight and exercise caution with respect to long positions over the weekend.

With USDJPY overshooting the .618 to tag the channel top and a small scale 2.618, I wouldn’t be surprised to see its rally fizzle here and SPX drop back from 2077 to set up for some of that chop we’re expecting.  Any significant downside should be constrained to 2055 — as the SMA20 is about to cross the red TL connecting tops from the past several months.

Another hurdle for bulls: the ten year yields have bumped up against the SMA20 and SMA50.  They could, and probably will, punch through — but probably not today, unless the consumer credit number is huge.

Again, I think there will be many head fakes between now and Dec 31.  While swing traders should be safe holding long, traders are likely to get whipsawed six ways to Sunday as the mechanisms of the rally will, at times, strain credulity.

For those who are new to the concept, the yen carry trade has been around for a while and is fairly straight-forward.  Borrow in yen at near 0%, invest in higher yielding instruments such as US treasury bills and pocket the difference. The only risk is that the yen would appreciate against the invested instrument’s currency, and one might face an FX loss when closing out the transaction.

When the BOJ announced they were going to cheapen the yen into oblivion, everything changed.  Investors suddenly didn’t have to worry about the currency risk; instead, it would be a currency gain.  They also found a more lucrative place to invest the proceeds of their borrowing: equities.

Since the BOJ also decided to prop up the Nikkei, investing the proceeds into Japanese equities became less risky.  And, when the Fed jumped on board with the Bernanke (and now, Yellen) put, US equities became more of a “sure thing.”

Today, we see tick-for-tick increases in US equities every time the yen dips (and USDJPY spikes.)  The correlation has been around 96% since the mid-October swoon.  The only times we see divergence between USDJPY and ES are when USDJPY dips precipitously.  But, then, there are other means with which to prop up ES, such as VIX.  USDJPY often “resets” after the US cash markets have closed (it’s done its job for the day by levering ES higher) lest it sail right off the top of the chart.

As long as the yen continues to cheapen, and central banks continue to intervene in equity markets (directly and indirectly) the yen carry trade will continue to work.

Abe has shown little interest in throttling back Japan’s QQE, even in the face of mounting criticism from households and businesses alike (cheaper yen = more expensive imports, especially food and fuel.)  In fact, the latest decision to expand QQE on October 31 is considered by many (including yours truly) as a desperate last gasp of policy which has clearly not managed to invigorate the Japanese economy.

Having said all that, we can at least identify key levels at which any remaining market forces might be expected to exert themselves.

First up is the .618 at 120.11.  This should be a major Fib level — 61.8% of the huge drop from 147 in 1998 to 75 in 2012.  Reversing at it would be bearish for equities.  Slicing through it, as has occurred with several previous Fib levels, would be quite bullish.

Note that it intersects with a channel top connecting the Mar 2011 (Fukushima) and May 2013 highs — each of which preceded a decent sell-off for SPX (22% and 5% respectively.)

Will it sell off?  Again, Abe & Kuroda seem to be hell-bent on running the yen into the ground.  The Oct 31 surprise was a sign of desperation, a last gasp effort to turn things around that will almost certainly not work.  Thus, they are fairly likely to continue overriding any pressure from rational investors.

With the end of the year coming up, I suspect we’ll see USDJPY barely pause at 120.11, but instead come back to backtest it — maybe even slipping below in the backtest.  Whether they can keep the scam alive after year-end, I can’t say.  But, there is little in the way of resistance other than the top of the tight, white rising acceleration channel the pair has been in since early November.

As we expected [see: Dec 1 CIW]  VIX broke back down below the channel line connecting its succession of higher lows dating back to July.  The rise above was, indeed, a head fake.

Taking all the above into account, I’m looking for USDJPY to hold 117.85 and VIX to be hammered back down to or below that channel line.

Today, it is backtesting that channel bottom just as USDJPY is seeing its first significant reversal (an endangered species) since the Sept-Oct swoon.

Here’s a look at the daily chart for perspective.

Should the backtest hold, the message is that stocks have fallen as far as they need to.  VIX will settle lower in order to prevent things from getting out of hand and stocks will now rebound (SPX just tagged 2062 — off 12 points.)

Remember, we’re looking for a fair amount of chop through year-end.  So, don’t be surprised if VIX vacillates around this TL for days or weeks to come in order to set the stage for stocks’ next push.

As always, it will depend on the USDJPY’s cooperation.  A more serious retracement there would trump VIX’s influence as we saw in Sep-Oct.  Keep an eye on 119.28 — channel and Fib support.

Update: EOD

So far, so good.  VIX reversed as expected at the channel bottom, dropping 1.14 (8.6%)  and kicking SPX 15 points higher (new highs, of course!) over the subsequent two hours.

At this point, VIX had retagged the white .886 and rebounded again over the remainder of the day.  USDJPY rebounded to only the .618 retrace of its morning highs.  When it failed to make any further headway, that was the end of the rally.  After a round-trip of 30 points, SPX closed off 2.4 points for the day.

Any further downside will have to wait until the after-hours.  But, remember, the after-hours is when USDJPY is free to decline without consequences.  ES is easily propped up if that’s what TPTB have in mind.

GLTA.