With the yen carry trade being the single biggest driver of the rally since 2012, how is it that the “market” continues to rally even after USDJPY has broken down?

Because, make no mistake about it.  The rising white channel has broken down.Fortunately for the bulls, TPTB have several other levers by which to force stocks higher.  And, as we discussed in our recent forecast update [see: The Big Picture] this low-volume holiday period is ripe for such a maneuver.

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This is The Powers That Be’s favorite time of the year — and, I’m not talking about the Christmas spirit.  The extra low volume ensures they are able to do pretty much whatever they want — including, of course, breaking chart patterns.

So, when we see a channel break down with bearish implications, we can’t just assume the “market” is heading south.  Such was the case yesterday with SPX.  It started the day by nailing our initial upside target — the backtest of the broken white channel — and then reversing to exactly where we expected.  From yesterday’s post The Big Picture:

Pre-open:  Futures are up 18; so, I’d be long on the open with a hard look at exiting around 2022-28.  9:33: That’s the first target down.  I’d close the long here at 2022.74 and short with tight stops (the SMA100 is just above at 2028.08.)  The initial objective is 2015-16. 9:58: That’s probably good enough for the short trade.  I’d take profits here at 2015.48…

It was good enough for 12.31 points (.61%) so I was happy to go to cash for the day — which, in hindsight, was a good idea.

Because, at that point, the rule book got tossed out the window and some very weird stuff happened — complete with the obligatory melt-up into the close.

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Since the last Big Butterfly Pattern completed on May 20, TPTB have managed to limit the fallout to a relatively minor correction that left the rising channel from 2009 intact.  On both a percentage and duration basis, the August plunge wasn’t even as bad as the 2011 one.

That is, of course, if one considers the correction to be over.

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One of the central conceits of Lost, a hit, mind-bending TV show from the last decade, was a protocol in which a sequence of numbers had to be typed into a computer every 108 minutes in order to avoid global catastrophe.  When the protocol (a.k.a. pushing the button) was not followed, an alarm would sound, giving the button’s keepers one final chance to avert disaster.

Goosing the USDJPY is the financial world’s version of pushing the button [why? learn more about the yen carry trade.]  When stocks are slipping, or merely need to be pushed up past overhead resistance, a quick spike in USDJPY is usually enough to obtain the desired result.

So, it’s troubling to the bullish case when the USDJPY merely goes sideways for nearly a year.  It’s even more troubling when the Nikkei 225 alarm goes off, warning of impending disaster.  Not only has NKD lost the support of the rising red channel, it has backtested that channel and plunged below its key moving averages.

The culprit, of course, is the BoJ — which has been derelict in its duty of pushing the yen lower (the USDJPY higher) for almost a year.  Since it leveled out last December, stocks have not only peaked, but put in some of the most dramatic declines seen since 2011.

Last night, the BoJ disappointed yet again when it announced its latest enhancement to QQE. As Kuroda himself said afterwards, “today’s decision wasn’t additional easing.”

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After all the drama surrounding the Fed’s 1/4% hike yesterday, the charts still point out one truism.  It’s still all about the yen carry trade and, specifically, the USDJPY.  As long as it’s rising, SPX will have the wind at its back — no matter how little breadth, how sketchy the fundamentals, how many miniscule rate hikes.

So, any analysis of the “market’s” next moves starts with a look at what USDJPY is going to do.

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If this were any other day, I’d say TPTB have the “markets” set up for a nice spike.  USDJPY has been pumped up over the SMA100 and SMA200 (now virtually on top of one another)…… CL has bounced sharply off the falling red channel bottom…… and, ES was ramped 12 points higher overnight.But, as we know, it’s not just another day.  It’s the day the Fed gets to demonstrate just how wise they are, how much control they have over the vagaries of the markets.  After all, they’ve tripled the S&P 500 over the past six years.  We should trust them to triple it again, and again, and again.

The only problem is that the mechanism that produced all those gains is getting very long in the tooth.  Though interest rates are a component, the mechanism that really matters is still the yen carry trade.The USDJPY has gone nowhere over the past year since arriving at current levels.  Hence, stocks have gone nowhere — particularly since completing the Big Butterfly Pattern in May.  At the time, we noted it was the last big Butterfly, and it ushered in a nice sell-off as we expected.

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Yesterday was a strange day, with SPX tagging our downside target (after an 18-pt spike that instantly reversed itself) and then going on a 25-pt tear led by ramp jobs in both USDJPY and CL.  It was just what the doctor ordered.  From our initial post:

The futures gave up almost 30 points overnight, but signal a small gain at the open.  SPX needs all the help it can get, as a drop through the white channel bottom would likely mean 1991-1996 for starters.

Today should be about positioning: the bulls for a breakout and bears for a breakdown.  With the futures up 22 points before the open, it’s pretty clear who has the upper hand in the after hours.  But, it’ll be interesting to see how things go once the rest of the world arrives and thinks long and hard about event risk.

Note that USDJPY bounced off the bottom of the channel from 2012 yesterday.  The two previous bounces were Aug 24 and Oct 15 — not shabby entry points.   Today, it’s all about the 100 and 200-day averages.

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NDX nailed the initial target identified in our September 24 update where it got a strong bounce that took it all the way back to the broken purple channel’s midline and a new all-time high.

This is pretty typical of NDX, which plays fast and loose with chart patterns and Fibonacci patterns — especially when it comes to popping up through resistance.

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In our September update [see: Sep 14 NG Update], we identified some bounce targets that would naturally follow the completion of a Bat Pattern in natural gas.  But, we also noted that NG, like oil, was being suppressed in order to facilitate the yen carry trade.

But, like CL, NG is being artificially suppressed in order to facilitate a cheaper yen.  When it comes to Japan, it remains to be seen whether central bankers can handle that kind of inflationary pressure.

If, instead, they wish to manipulate it lower, the white channel bottom down around 2.00 would make a nice downside target.

Six weeks later, NG tagged that downside target — dipping slightly below it to 1.948, a stunning 30% drop.  The 26% bounce to 2.48 in mid-November was nearly as impressive.  When NG retraced a 78.6% of that rise last Friday, I didn’t think too much about it.  It was due for a bounce.But, this morning, NG gapped down to 1.862 — a low not seen since March 29, 2009, a few weeks after stocks finally bottomed out.

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I used to really love VIX as an indicator of future market moves.  For the past several years, however, central banks and their proxies have been using it as a tool, bashing it every time they wanted to goose stocks.

Still, there’s value in charting it, if for no other reason than to understand what games they’re up to — or, when they’ve lost control.

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