Yesterday’s melt-down was a good start on the Bat Pattern reversal, reaching the white .618 on its way to the cluster of moving averages we discussed yesterday and coming within 3 points of our downside target issued in Monday’s member section [see: Strange Brew]:

Whether or not the rumor is true or the interview even occurred or the finance minister was telling the truth…who knows?  All I know is that the .886 was tagged and our bias is to the downside from here at 2128.  First downside target is 2105.34.

This morning, we have blow out data on personal expenditures which has initiated a sharp rally off of absolutely no technical support.  While the data’s benefit to the economy is dubious (are higher gas prices really going to aid in a recovery, or will we all spend less somewhere else?) the 14-pt spike in the eminis since yesterday’s cash close is a quandary.

Fortunately, there are other technical indicators which provide some important clues.

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SPX has continued to sell off, if tentatively, since we called for a reversal after Monday’s Bat Pattern completion.

But, it hasn’t yet left the comfort of the rising gray channel and is back above the purple channel midline.   For now, the all-is-well meme is staying alive.

Along the way, VIX revisited the yellow channel bottom……while USDJPY bounced where it needed to……and, CL kept its rising channel alive — so far.   Like SPX, it’s on the cusp of a significant breakdown.With Greece acting as the canary in the global financial markets coal mine, can we really tell what’s coming next?  There are quite a few clues.

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First, CL has gone essentially nowhere for about 7 weeks.  With SPX having completed the Bat Pattern and CL hanging by a thread, I think the next move is down — likely to the white channel midline at 57.94 or bottom at 49.72 — but potentially to test its former lows.

Then there’s EURUSD, which is straddling the fence between bullish and bearish.Yesterday’s dip below the purple channel midline and today’s backtest suggest further downside.  I like the idea of it, but the timing suggests a 4th of July low.  As we discussed yesterday, that would be unusual.

Yet, several of the potential downside targets for SPX suggest the same outcome — if, of course, the white channel bottom can be broken and the SMA200 tested.

Shorter term, our targets remain the same as yesterday’s.  SPX should find support at the bundle of moving averages between 2105-2107 (the 10, 20 and 50.)  But, if those fail, a backtest of the falling red channel is in order — followed by our 2050 target.  The SMA200 is now up to 2051.57.  The rising gray channel should provide strong clues as to the intra-day moves.   A close-up: Last, note the negative divergence between SPX’s price and its daily RSI — which is bumping into a falling TL (white) from early in the year.  Of course, it’s also bouncing back and forth in a rising channel (purple.) 

The bearish case is highlighted by the sequence of lower lows represented by the dashed red TL: 

It can also be captured by a falling channel, shown below in red: 

I have to be out of the office today, but will try to check in during the day.

GLTA.

SPX finally reached our yellow target yesterday, slipping just past 2127.59 and testing our resolve before reversing into the close.  From yesterday’s member section:

Recall that Thursday’s highs came up just short of a .886 tag, so it’s entirely possible that SPX will make it back to 2127.59.  We’ll set that as our upside target for now. For wave watchers, it would constitute a truncated 5th wave in a very mild 3rd from the 2072 lows [or, taking the bearish view, a completed C wave in the corrective wave from 2072.]

While investors wait patiently for the latest great news out of Greece, currencies are racing around like crazy.  The euro is taking a beating…

…which has sent the dollar soaring……which, of course, is boosting USDJPY……which is enabling the eminis to cling to a slight gain.  But, will it hold?

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Combine one part meaningless press conference, one part unfounded rumor and two parts goal-seeking algos and you end up with a 19-pt ramp job overnight.

The Greek situation remains volatile, though it seems pretty clear that deadlines will continue to be extended until TPTB can announce something they consider a “success.”

Friday’s drop easily tagged our initial downside target and within 4 points of our secondary one.  At the current pace, this morning’s ramp is likely to undo all that downside.

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Yesterday’s forecast worked out reasonably well.  From the member section:

In the meantime, I can easily imagine a pseudo-breakout that reaches the white .786 or .886 (yellow dot) into the end of the week.

The 26-pt spike took SPX to 2126.65, less than one point away from our yellow dot at the .886 Fib — close enough for government work, which is pretty much what it was.

The mainstream media consensus was that the factors which produced the single biggest opening minute ramp job since 2011 [per Eric Hunsader at Nanex, see HERE] consisted of mixed economic news and lower-than-expected inflation that would cause the Fed to hesitate in raising rates later this year.

This, on the same day that the IMF floated the idea that central banks will need to act as the buyers of last resort the next time “markets” crash — which, of course, is exactly what will happen if investors ever get the sense that the central bank intervention (which drove prices to unsustainable levels in the first place) is waning.

While we’ll never tire of nailing our forecasts, we yearn for the days when something other than central bank intervention and joined-at-the-hip algorithmic HFT ramp jobs determined stock prices.

On to today’s forecast.

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Yesterday morning, we titled our daily post with the rhetorical question: “has the Fed found its backbone?”

After 7 years of currency, interest rate and stock market manipulation, is the Fed finally ready to let the “markets” find their own equilibrium and hazard even a 0.25% increase in interest rates?  Apparently not.

From the rearrangement of the dots, we can surmise that the FOMC has become, if anything, more cautious regarding the forward outlook.  Rate increases will likely be later and lower than last forecast.  Our outlook remains that the increase will be minimal or, more likely, non-existent in 2015.

Surprisingly, even the mainstream media is starting to pick up on the “Fed backed into a corner” narrative.   See this INTERVIEW, which aired on CNBC of all places.

The S&P 500 loved this news, and bounced nicely where/when we expected.  Yesterday morning, we suggested a short at 2103.64 (2103.67 was the high) and covering at 2095.61 for conservative traders and the SMA100 (2089) for more aggressive types.

These proved to be the correct turning points, which were followed by an algo-driven melt-up into the close as expected.

Remember, at least 75% of the time, FOMC announcements/press conferences have led to a frenzy of algo activity that drives prices higher into the close.  It’s part of the “FOMC has got our back” meme that investors have come to accept/expect.

The algo was of the crude oil futures variety, with a 3.6% spike from yesterday’s lows through last night’s ramp job which has left the eminis 6.50 points higher a few minutes before the cash open this morning — despite USDJPY’s continuing slump.

Where to from here?

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Central bankers everywhere are publicly conceding that their creations (aka “markets”) are overpriced.  Yellen herself has uttered the “B word” on more than one occasion.

So, it is with great curiosity that we approach another FOMC Jamboree that will either further inflate the myriad bubbles or seek to let just a little air out — ideally without popping them.

After nailing our downside target on Monday, SPX rebounded to slightly higher than our bounce target.  Will it break out again?  It all depends on Ms. Yellen & Co. and whether they can locate their long lost backbone.

Remember, at least 75% of the time, FOMC announcements/press conferences have led to a frenzy of algo activity that drives prices higher into the close.  It’s part of the “FOMC has got our back” meme that investors have come to accept/expect.

A quick look at the S&P eminis this morning.  The threat of a breakout is very real, but we have a pretty clear line in the sand with which to identify it.

My preference is to stay on the sidelines on days like today.  The algo-driven rallies don’t always last, and there are often sharp spikes in either direction.

UPDATE:  9:35 AM

A short-term shorting opportunity here at 2103.64 as SPX just nudged up against the SMA50 and still no breakout on ES.  Tight stops are advised.

Updated targets and currency charts coming up in a few.

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On June 10, in Did Kuroda Just Kill the Bull Market? we highlighted Bank of Japan head Haruhiko Kuroda’s surprising announcement to the Japanese parliament:

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come.”

After a massive (sarc) 3% slide in the Nikkei in the ensuing week, Kuroda has had second thoughts.  Last night:

““I didn’t say that I’m not seeking a weak yen in nominal terms, nor did I say that it’s unlikely that the yen will fall further.”

Say what???  He further “clarifies:”

“I didn’t mean to evaluate the current nominal exchange rate or forecast the outlook.  I just gave a theoretical explanation in response to a question about real effective rates.”

The “question” isn’t on the record — at least that I can find.  And, though I have no video to support this, I’m pretty sure that last comment was accompanied by a well-timed wink.  Consider the Nikkei 225, of which the BOJ has a sizable and growing position.

The yen’s last major deflating — reflected as a rise in USDJPY — came amidst the October 2014 market scare.  The S&P 500 had fallen 9.8% in less than a month (the Nikkei 12.3%.) The Fed and the BOJ swung into action.

Fed President Bullard hinted at QE4, and the BoJ immediately monkey-hammered the yen — followed a few days later by a massive increase in QE and direct stock buying by the BOJ itself and the government pension plan. The impact was dramatic.

NKD spiked 21% in just two weeks (SPX by 11%.)  But, it wasn’t quite enough for the NKD to top its nosebleed 2007 highs.

Why not?  On Dec 4, the USDJPY reached a major Fibonacci level: the 61.8% retracement of the drop from 147.65 in 1998 to its 2011 lows of 75.56.  Big investors who depend on the lucrative yen carry trade for huge profits [see: The Yen Carry Trade Explained] reined in their equity exposure — as is illustrated below.

The .618 Fib is shown as the dotted yellow line (at 120.11), and the daily SPX values are plotted as a thin purple line on the chart below.  Note the wild swings in SPX that began right after USDJPY reached 120.11.

Every time stocks started selling off, the USDJPY would magically make a bee line for 120.11 — typically landing just above it in order to reassure carry trade investors that all was well (producing a series of new highs for SPX.)

In late May, when SPX completed the last major Fibonacci Pattern on the its chart [see: The Last Big Butterfly] and was threatened with a major reversal, what happened?  USDJPY suddenly shot from below 120.11 to 125.84.

On the other side of the Pacific, the manipulation was even more obvious.  NKD approached its 2007 highs in December exactly as USDJPY reached the .618 Fib at 120.11.  They both peaked on Dec 5.

Every time since then that NKD needed a boost, USDJPY would shoot up past 120.11 — if only temporarily.  The objective?  Maintain the rising red acceleration channel that offers an opportunity to break out of the rising white channel from 2009.

Note that Kuroda’s initial comment talking up the yen (down the USDJPY) came as NKD had reached the top of its white channel and the midline of the red — natural reversal points in chart pattern theory.

It’s common knowledge that many in Japan are not happy with the yen’s demise.  In a country where almost everything is imported, it places a real burden on consumers and manufacturers alike.  Despite Kuroda and Abe’s insistence to the contrary, inflation is already a problem.

Oil, which was deliberately crashed for a plethora of reasons [see: Those Wacky Central Bankers], has rebounded strongly — up 37% in yen terms since we called the bottom on March 17 [see: Update on Oil.]

Aluminum has soared in yen terms, up 64% since its 2012 lows and easily outpacing the growth in sales a cheaper yen promised to deliver the auto manufacturers.

On the consumer side, fresh food prices are hitting new highs.

And, meat prices are through the roof.

In short, a plunging yen places an very real and onerous tax on the very consumers and businesses who are already being bled dry by rising taxes.  Kuroda knows this, and started talking up the yen on June 8.  The Nikkei 225 immediately plunged 4%.

The USDJPY found channel support (red mid-line), which allowed NKD (thin purple line above) to recover (a Fibonacci) .886 of its losses.  But, its failure to retake the Jun 9 lows and subsequent failure of a short-term trend line has left NKD vulnerable to additional losses.

Enter Kuroda again, helping us better understand his comments of last week.  NKD’s decline was arrested, just in time to preserve the rising red channel discussed above.

SPX is up about 8 points and, in fact, just nailed our secondary bounce target posted in yesterday’s members section.

SPX just tagged our next downside target, reaching 2074.26…  An ideal bounce spot would be back to the SMA100 at 2088 or even the gray midline around 2092.

With the “markets” subject not only to made up news stories (what’s the latest tweet re Greece?) but the constant manipulations unleashed by politicians and central bankers, is there much value in economic analysis or charting anymore?

Clearly, Japan is in deep, deep trouble.  They’ve gone all in on the yen carry trade and are, effectively, holding a very large heavily margined position in stocks and bonds that would absolutely crater were the yen to strengthen significantly.

Caught in between the rock of protecting their balance sheet and the hard place of screwing over the Japanese people, they’re apparently going with the rock.  When push comes to shove, Kuroda explains, the yen can absolutely go even lower.

As long as it does, the yen carry trade needn’t unwind — much like in 1995-2000 and 2003-2007.  If it should reverse, however, run — don’t walk — to the nearest exit.

We won’t know until it happens how effectively central bankers can stave off a true market crash once it gets started.  We’ve had several warning signs already — including the Big Butterfly Pattern completion on May 20.  I for one, would rather remain aware of the danger zones ahead instead of cruising blithely along, assuming they won’t bite me as long as I ignore them.

Coming up: today’s market update and forecast.

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It’s a small dose, to be sure, but this morning’s Empire Fed Survey is a reminder that not all is well in the land of ever-increasing stock prices.It’s adding to continuing Greece concerns and an unusual trifecta of faltering algo drivers.  CL is in danger of losing the rising channel bottom (finally catching up to reality?)USDJPY, while bouncing, is still under the influence of last week’s Kuroda buzz kill [see: Did Kuroda Just Kill the Bull Market?] after reaching our 125.72 target last week.And, EURUSD is going the wrong way for all the right reasons (for a change.)

As for SPX, last week’s downside targets remain firmly in place, with the initial plunge certain to break the SMA100 (2087.96) yet again.

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“If you give a mouse a cookie, he’s going to ask for a glass of milk. When you give him the milk, he’ll probably ask you for a straw. When he’s finished, he’ll ask you for a napkin. Then he’ll want to look in a mirror to make sure he doesn’t have a milk mustache.”

And, the familiar children’s classic goes on from there – one amusing unintended consequence after another.

One parallel in the investment world is oil.  If you ramp up oil futures in order to convince investors that demand and profitability are coming back, you run the risk of those higher prices showing up in some unfortunate places — such as PPI.

And, if PPI rises, say, the most in three years, investors will come to fear higher interest rates from central banks.  And, if they fear higher interest rates, they’ll start dumping bonds — which are bid up to impossibly high levels by those same central banks. If investors start dumping bonds, you will get those higher interest rates of which they were afraid.

If governments can’t sell bonds at 0-2%, then their budgets — which have been balanced on the back of zero interest rate policy — go belly up.  And, if government budgets go belly up, we might just have a financial crisis that spirals out of control.

Wouldn’t that be an amusing unintended consequence?

Crude light is up 37% since its March lows — largely to mask the fact that the all-important yen carry trade is faltering.

The yen carry trade is faltering because the yen basically squatted at 120 for over 5 months.  USDJPY finally broke out at the end of May, only to be talked back down two days ago by Kuroda himself [see: Did Kuroda Just Kill the Bull Market?]

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come.”

In a “market” that has thrived on zero interest rates, investor complacency and central bank manipulation, we have to wonder how much longer the free lunch can last?

Yesterday, SPX slightly overshot our upside target (2112, later revised to 2115 in the member section.)  Our downside targets remain in place.  But, watch out for those Greece rumors, which can send prices soaring or plunging regardless of their veracity.

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