The Nikkei barely paused at the .886 Fib yesterday, choosing instead to backtest it in order to leave its options open.

The weekly chart shows that, should the last high be broken, the next serious Fib resistance isn’t until the larger scale .886 in the 17,100 area.  This works with the channel and TLs.

The Nikkei continues to drive US equity prices higher as an integral piece of the yen carry trade.  It ramps during the day, and resets during the night (lighter shade.)

The USDJPY has broken out of the yellow channel.  So, we have to consider the probability that the purple channel is in play — to the extent that any chart pattern matters anymore.  The BOJ’s Kuroda says all is well, it’s all part of the plan.  But, both Japanese businesses and consumers are frustrated with rising import prices.

Note the red channel has the same slope as previous engineered rallies — neither of which ended well.

But, look closer and you’ll see the small purple line off to the side of the red channel.  This is the new channel in which USDJPY is resurrecting its rally.  At some point, it will either rejoin the red channel or backtest it (110ish.) I would expect some backing and filling in here, but as long as it remains above its SMA10, why fight it?

The same thing happened in Apr 06, when a break in the white channel send the pair plunging (SPX lost 7.5%.)  It regained its footing and went on to make new highs in Feb and July of 07 before the wheels came off completely at just past the purple .618.

Bottom line, the pair is completely manipulated — as is the Japanese stock market, in which the BOJ routinely “invests.”  It will continue to rally until the pain of importing much more expensive goods leads those afflicted by it (anyone other than investment bankers, hedge funds and their central banking lackeys) to force Abe from office.  The chorus is growing.

For anyone wondering why the SPX stopped on a dime this morning, it was an old friend.  Hint: there’s something to please both bears and bulls.

The Inverted H&S Pattern we forecast last month has finally completed. A close above 2020ish will confirm.  Good for bulls, right?  Only fly in the ointment is everything else: the dollar, USDJPY, NKD, notes, etc. are all overbought.  So, there’s a fair to middling chance this will not be a clean break and moon shot.

If it is, the target is 2115 from 2020 — a nice 4.7% rally.  If it isn’t, there’s a very big chasm down below that QE won’t be around to prevent.

The thing that really puzzles me is that 2115 isn’t 2138 (which is the very important 1.618 Fib of the 2007-2009 drop from 1576 – 666.)  Why get us most of the way there?

However, 2138 works quite well as a target from 2044 — the grey 1.618 of the Jul 24 – Aug 8 that set up this IH&S in the first place.  And, it just so happens that the grey channel midline reaches 2044 around Oct 10.  This leads me to consider the possibility that SPX will not break out in the next few days, but will dither and dally in some sort of choppy expanded flat for a while — maybe even dropping below the current right shoulder and testing a SMA50 (1975) or SMA100 (1950.)

We’ve seen countless H&S Patterns fail in the past year; so, it’s not hard to imagine that this one will be yet another great big head fake.  Still, the confluence of the 1.618, the grey 1.618, and the 261.8 Time Fib on Oct 20 seems more than coincidence.

For anyone who doesn’t remember, the Time Fib is generated off the 2009 low, with the May 2011 high as the .618.  It fits many of the highs and lows since 2009 extremely well.  The hitch is it doesn’t tell us whether Oct 20 will be an important high or low — just that it might be significant.  And, as the chart indicates, it can easily be off by a week or two.  But, it’s worth keeping an eye on it — especially since past Octobers have been significant, and this one will feature the last installment of the freak show that is QE (for now.)

GLTA.

Well, we got both our upside and downside targets — all in quick succession.and downside targets — all in quick succession.

But, what’s really caught my eye is the Nikkei — which reached a large scale .886 — and the USDJPY — which reached the large scale 1.618.  Neither has backed off appreciably, but they should.  If it happens during the trading session, it will be tough for SPX to maintain upward momentum.

USDJPY has officially left the reservation.  Not a lot of overhead resistance until the yellow channel top at 110ish.  After that, lots of blue sky.

Not much consolidation after yesterday’s Hilsen-rally.  So, I’d look for a backtest of the SMA10/20’s on any pullback.  Otherwise, SPX never reached the .786 or .886 yeaterday.  Those would have to be the immediate upside targets.

The SMA50 looks miles away, now.  But, as the talking heads have pointed out, anything can happen on FOMC day.

UPDATE:  12:45 PM

We’ve seen general weakness following the early session ramp job.  Here’s a quick look at support and resistance.

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Good channel resistance here… would make a nice turning point if the SMA50 is going to be tested.

UPDATE:  5:30 PM

Coulda, shoulda, woulda…  Hilsenrath says the Fed will keep the juices flowing, and that’s all the “market” needed to hear.  I have no trouble believing it, as the end of QE is enough of a risk for the Fed without piling out higher rates in the near term.

Note yields sure look like they’ve run out of steam.  And, most of the time, plunge in yields = lower stock prices.

There’s no Fibonacci argument for lower prices in SPX at the present time; but, the fact that the USD remains stuck at the inflection point we discussed last week suggests this corrective move down from 2011 isn’t yet complete.

Recall that the .886 Fib is a larger scale reversal point that coincides with a channel midline that has been quite effective in the past.

The correlation between SPX and DX has oscillated significantly over the years.

But, given that much of the equity strength since Oct 2011 has been based on USDJPY strength (yen weakness), I think this bears watching.

SPX has two moving averages that happen to coincide with significant Fib levels.  I tend to think the current corrective movement will seek one of these targets.

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It’s a battle of the channels…

If the red channel holds, we should revisit the yellow neckline.  As always, keep an eye on USDJPY.  It is extremely overbought.

But, the guys writing the script are stuck.  Any move lower will tank stocks.  The market is addicted to an ever cheaper yen.  Withdrawal won’t be pretty.

And, note how prices have returned to close at the 1.272 Fib every day since first broaching it.  Clearly TPTB realize it’s out of control.

The BOJ is royally screwed.  Japan, which is already monetizing its own debt courtesy of the BOJ (most recently, at negative interest rates) would collapse under higher interest rates.  Rates must stay low, which will continue to put pressure on the yen — especially relative to the USD as the Fed tightens.  But, consumers, stretched to the limit with yet another tax hike on the way, simply can’t handle the higher food and energy costs which would accompany a cheaper yen.

Frankly, I don’t see a way out — which usually means they’ll do something even more irresponsible — like ballooning the BOJ’s balance sheet even more in order to keep the house of cards standing just a little longer and keeping USDJPY in a holding pattern as long as possible.

What will happen to the yen carry trade?  I can’t say.  With EURUSD’s continuing collapse, perhaps the hedgies will shift gears. But, as we noted a couple of days, ago, the dollar itself could be ready for a correction.  It should be an interesting next few weeks.

UPDATE:  12:15 PM

Looks like SkyNet has taken over at this point, with USDJPY and VIX taking turns pushing stocks around.  Things could get interesting if that rising wedge in USDJPY were to break down.  But, it’s more likely to happen after-hours.

Volume has gone bye-bye; so I think I’ll sit the rest of this one out.  Chances are we’ll get a big move over the weekend, but it’s anyone’s guess which direction as we’ve discussed in the past few days of big picture charts.

UPDATE:  1:45 PM

Spoke too soon!  USDJPY played along…

…and, helped ES reach the H&S neckline as we originally discussed this morning.  There’s more downside potential, of course, but it looks like USDJPY is done for now.  While it’s always nice to be right, I hate the fact that the algos were completely responsible for the move.  Will we ever get our market back from the machines?

Have a great weekend, everyone.

 

Another disappointing jobs report — which last week led to a market rally as it was interpreted as a hindrance to Fed rate hikes.  Trade safely.

The dollar chart has my attention today, as DX has completed a Bat Pattern at the key channel midline line. It has failed to advance past the midline five previous times. So, it’s safe to characterize it as an important inflection point.  Should it fail again, it has huge implications for USDJPY and EURUSD as well.

The longer-term view:

Yesterday’s USDJPY-driven ramp in the last several hours that took prices back above the H&S neckline puts a dent in our downside case.

Though, I believe there’s still a good argument.  Looking at the futures, we can see a well-formed channel, the top of which we will likely test around 10am EST.  If the usual morning pump runs its course by then, look for a dump as indicated.

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USDJPY ramp continued into the night, tagging the daily 1.272 and completing a Butterfly Pattern.  As we’ve often warned, a decline in USDJPY could end the dollar-yen carry trade momentum stocks have enjoyed since Abe first began trashing the yen.

There have been two very interesting developments in the past 24 hours. First, The BOJ just bought 3 month bills at a negative yield — in essence directly funding the Japanese treasury.  Second, Japanese finance ministers have started talking up the yen, stating that a lower exchange rate with the dollar “would not be desirable.”  Is the carry trade over, or are mom and dad merely squabbling?

 

Note that each USDJPY reversal beginning with Jan 2 (Point A) caused sizable sell-offs in stocks. From A to B corresponded to 104 points; from C to D was 77.  And, the mere thought that the party was over at Point E touched off the August swoon in stocks.  What if the party really were over?

 

After nailing the first two downside targets (D1 and D2), I’m more than a little nervous offering up a third.  But, here goes.

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Continuing the theme began yesterday of big picture items, we’ll take a quick look at interest rates.  The 10-yr note was another of those bearish charts from earlier in the year.

While the talking heads insist that lower rates would be a good thing for stocks, the chart shows otherwise.  Reversals from tags of a falling white channel as well as the yellow dashed trend line led to stock sell-offs, as the chart from March clearly shows [see: Eye Candy for Bears]:

As we anticipated, rates did, in fact, decline from the start of the year.  Yet stocks have done anything but follow along.  What gives?

Rates can decline for lots of reasons.  But, the chief reason for the highlighted past declines was fear.  As markets were perceived to become riskier, money at the margins flowed from equities into bonds and notes — bidding u prices and driving rates down.

If investors have learned anything from the past year in the “markets,” it’s that there is nothing to fear.  Each (successively smaller) dip has been aggressively bought. Margin debt and complacency are at extremes.  And, long-short hedge funds have stopped shorting all together.

Time will tell whether the relationship between TNX and SPX that dates back to 1998 is broken, or simply hasn’t played out yet.  With QE ending next month, I tend to think the latter.

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Today’s initial sell-off reinforces our downside case — but, only if prices move through a critical level.

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SPX and ES ramped strongly into the close after tagging our initial downside target Friday, but there’s been plenty of negative news (China, EU, Japan, Ukraine) in the last 72 hours — adding to a somewhat confusing Fib picture.  Note the strong swings in either direction in the past week, repeatedly crossing the IH&S neckline.  I remain partial to the 2nd downside target of ES 1981.50.

Japan’s economy continues to contract, weakening the yen (and aiding the USDJPY) — a net positive for US stocks. The euro also continues to weaken following the Scotland polling news.  China continues to falter.  Net net, the dollar is the key over the next few days.

Remember the long-term USDJPY chart from December 26, 2013?

We noted that previous tags of the top of the yellow channel from 1998 had not been kind to equities, prompting declines of 22%, 35% and 57%.  We also noted that USDJPY would decline in the next few days, which it did — plunging from 105.43 on Jan 2 to 100.74 on Feb 4.  SPX lost about 112 points as a result — a 6% decline.

What we didn’t see coming was the BOJ’s decision to put a floor under USDJPY at 101.43.  Indeed, ten subsequent attempts to pierce 101.43 were each rejected vigorously — which fueled the dollar-yen carry trade, resulting in a series of new highs for US stocks (the thin purple line.)  The last boost was the strongest, taking USDJPY all the way back to the previous high — and, importantly, the top of that yellow channel yet again.  And, FWIW, the Jan 2 high of 105.43 came in just shy of the .618 retrace (105.57) of the drop from the 2007 high to the 2011 low.

The big question, then, is whether the BOJ will be content with the pair trading below 106, or will they feel compelled to ramp it up to new highs?  Abe’s advisor Koichi Hamada hinted this morning at further yen weakening.  According to Bloomberg:

“The weak yen benefits the economy by increasing corporate profits, capital spending, employment and tax revenues even if it hasn’t boosted exports,” said Koichi Hamada, 78, who helped Abe design his reflationary policies. “It’s a positive for Japan’s economy.  I understand why the BOJ is not trying to stop the yen weakening, as they see sustaining the recovery as important and the weak yen as a tailwind for the economy.  The yen is back at 105 yen per dollar now and it looks like it’s going to weaken even further.” 

This echoes BOJ’s Kuroda, who last week proclaimed that a weak yen “wasn’t negative for the economy.”  A lower yen, of course, boosts exports. The flipside, however, is that it increases the cost of imports — which affects everybody in Japan who eats, travels, heats their home or factory, buys raw materials for manufacturing, etc.

Like the Fed, the BOJ touts a low rate of inflation by excluding many real and meaningful price categories which are positively soaring. With the nukes offline (for now) fuel prices are a particular problem.

Toss in a 60% increase in sales taxes — and another 25% increase coming next month — and the citizens of Japan are feeling the pain.  Abe’s popularity slumps a little further with every tick higher in prices and taxes.

Bottom line, someone has to be thrown under the bus: either Japan’s consumers or its exporters.  Neither is palatable for the politically savvy Abe, leading us to believe the USDJPY could remain in the 102-106 range for the foreseeable future, with any further declines in the yen limited to Draghi-style jawboning rather than actual intervention.

If it pushes above the January highs of 105.43, however, the question is moot.  It will have broken out yet again.

…to be continued…