I’ve read so much criticism of technical analysis, chart patterns and harmonics lately that I’m taking the opportunity to crow about today’s results.  Our intraday calls on SPX delivered our best single-day results ever: 4.8%.

From today’s post:  What Next?

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At the open:

SPX’s upside targets today include a backtest of the .618 [Fibonacci level] at 1940.63, followed by a close of the gap at 1970.89 [note: though charts indicate SPX opened at 1898.08, we use 1919.02, which was the low at one minute after the open — by which time all purchases should have been made.]

9:47 AM:

SPX has successfully backtested the .618 — the first potential turning point.  If it reverses here, then the .886 at 1856.46 is on the table.  If not, then we should see a continuation up to close the gap and potentially backtest the bundle of key Fibs and horizontal support at 1980ish.  I’d take a shot at a short, but keep an eye on USDJPY and NKD for signs of a reversal.

11:14 AM:

USDJPY threatening to break above 120.11.  It was enough to send SPX through 1940.63, so we’ll abandon the short and revert to the long side with the next upside target being the gap close.  Be aware, however, that neither USDJPY or NKD has truly broken out — merely threatening.  So, we could be reversing this long position at a moment’s notice…  Above [1940.63], the target is 1970.89.  Below it, the target is 1856.46.  Follow USDJPY and NKD for indications.

NKD and USDJPY’s patterns broke down, and SPX’s move above 1940.63 proved to be a head fake.  Per our 11:14 update, this called for a short position.

1:40 PM:

Quick update… NKD is bouncing (for now) on the rising TL, while USDJPY broke down from and is backtesting its channel.  SPX has reached 1920 so far. [A trendline from yesterday’s lows] could provide support at 1887ish around the end of the day, with a gap down to 1856 in the morning.  A drop straight to 1856 today would be cleaner and neater, but things are rarely that simple these days.

3:44 PM:

SPX has reached the rising TL and is approaching the .886 Fib.  Looks like it might just close at or below 1887.87 as we discussed earlier. Next lower support, again, is 1856.46.

3:52 PM:

For anyone who can’t hedge overnight, I’d either take profits here at 1879 and go to cash or put in a trailing stop into the close. Still looks like it has further to go, but will we get there in the next few minutes? If you can hedge overnight, I think it’s fairly likely we get to 1856 in the morning.

SPX closed at 1868.14, a full 72 points from where we shorted at 1940.63.  And, of course, 1940.63 was a 21-point gain from 1919.02.  All in all, it was a very cool 93-point (4.8%) gain.

It’s even more cool considering it happened on a day when folks who don’t believe in chart patterns, harmonics and technical analysis were running around with their hair on fire. Well, not literally we hope…

Last, a special congratulations to any new of our new members who put at least $20K to work today, following our market signals.  You’ve paid for the next year’s research on the first day! *

* my lawyers would want me to remind you that this sort of thing isn’t the norm.  We’re only averaging a little over 13% per month so far this year.

A lot of folks get that wrong.  They talk about Japan’s “deflation trap”, as though everything would be just great if only Japan could just manage to get inflation back above 2%.

In Japan, as in the US and the eurozone, inflation has been defined into non-existence.  We accept terms like “core inflation, without the volatile food and energy component” as though it actually meant something.  Sounds official…even sounds legitimate.  It’s not.

There’s plenty of inflation.  Just ask the person who does the shopping or pays the bills in most households.  Even with the recent oil crash that was engineered to protect the yen carry trade, real inflation at the consumer level is more like 7-8% (for more, check out John Williams’ excellent website.)

No, the real trap that could drop kick Japan’s economy into the Pacific is the outrageous amount of stocks they’ve bought on margin over the past year. I consider it an equity trap.

The most recent data show the BOJ owns almost  ¥7 trillion in stocks outright.  I understand they’re not buying stocks on margin at the local Schwab office.  But, when your stocks are 70X your capital, you’re heavily margined.

Not only that, the ¥140 trillion Government Pension Investment Fund has allocated 50% of its assets to stocks.

Let’s round it off and say the bank/government of Japan has an equity position of ¥80 trillion ($666 billion at 120 yen/USD.)

First, note that this almost exactly the amount of annual easing that was announced in last October’s QQE expansion.

More ominously, it leaves Japan in a do-or-die situation.  At its lows yesterday, August 24, the Nikkei 225 was off 9.5% from Friday’s close.  Not that you’ll hear this on the news, but it’s off a full 18% in less than 2 weeks.  I know, I know, it’s China’s fault…

If all of that $666 billion were in the Nikkei, the last two weeks’ exposure to equities would have cost Japan $120 billion — 2.4% of GDP!

Sure, some of it’s on the books of a long-term pension plan, and the rest is presumably not going to be realized anytime soon.  But, the data illustrate just how vulnerable Japan is since it: (1) put that much money into stocks; and, (2) is doing so in such a leveraged fashion.

At the end of the day, taking on this much risk smacks of desperation.  It’s probably because Japan is desperate.  With over 40% (and growing) of Japan’s borrowings going to pay interest on existing debt — which is already over 250% of its (shrinking) GDP — don’t expect things to change anytime soon.

And, don’t expect the BOJ to sit idly by and allow the equity trap expand out of control.  They have no choice but to increase QQE and/or devalue the yen again, and soon.

For more on the yen carry trade and why central banks are working to protect it at all costs, check out:  The Yen Carry Trade Explained (Why the Rally Won’t Die.)

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If there were any doubts about the relationship between the USDJPY and SPX, yesterday’s price action should have laid them to rest.  As we’ve maintained for the past couple of years, the yen carry trade is the single most powerful influence on stocks’ unending rally and has been since October 2011.

Knock the ever-depreciating yen out of the equation, and — as we saw yesterday — the “markets” start behaving like real markets. They actually begin to reflect the deteriorating fundamentals underpinning over-inflated prices.

We could leave it at that.  But, it’s important to note that yesterday’s mini-flash crash was no less scripted than the past five years’ rally.  The opening plunge took SPX slightly past our initial downside target of 1887.87, and landed NKD and USD JPY just shy of our targets for them.continued for members…

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Better late than never.  Our analog has finally played out, 11 days later than expected.  As we forecast would happen back on March 27 [see: A New Analog], the trillions that have benefited either directly or indirectly from the yen carry trade [explained HERE] are now suffering from the USDJPY’s decline.  From that original post five months ago:

Back to the 2012-13 timeframe:  USDJPY first closed at or below (at) its SMA200 again on Oct 23, 2013 a total of 366 days (≈1 year) from Oct 22, 2012.  The equivalent this time around would be Aug 13, 2015.

The chart below from July 17 [see: Analog Update] shows that original USDJPY target (as well as a potential earlier date): The pair went up to tag our upside target, and has now finally returned to earth — plunging below the SMA200 target as well as the vital .618 Fibonacci level (in yellow below.)

Remember, the yen carry trade depends on a depreciating yen (increasing USDJPY.)   An appreciating yen breaks the cycle, and we get crazy declines in a market that has been propped up so long by the BoJ’s actions.

Want higher prices again?  Simple: the BoJ must announce an expansion in QQE (the Fed could also play a role) or at least make sure USDJPY gets a very big bounce right here.  Key levels to expect after the break…

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No, it’s not another apocalyptic warning from the tin foil hat crowd.  It’s just that NKD is closing in on our 19,240 target (between 29,210 and 19,240.)  In my opinion, it’s the most important of the dozens of charts that I follow.  And, as a reminder, it fits in perfectly with our analog as well as our forecast for the Nikkei.

From our last NKD update on Aug 12:

Will the next meltdown will be the charm?  Time to ladle a little QQE on top of the currency manipulation?

When the yen carry trade makes the global financial markets world go ’round, and the central bank that makes the yen carry trade happen is also responsible for propping up the Nikkei 225, and said central bank is facing a colossal collapse of its phony baloney economy if the Nikkei should collapse…

Well, let’s just say that — whether by carrot or by stick — we expect the BoJ to “do the right thing.” They just need the proper motivation — which should be delivered today.

Our next major downside target is likely to be tagged in the opening hour today.

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Yesterday’s downside targets remain in place.

When SPX spiked higher last week, the steep white channel it followed seemed a bit overdone — to the point where it led to a false red channel breakout on Monday.  We were left to wonder whether the Butterfly Pattern set up by the Jul 27 dip would be one more casualty of the PPT.  If so, the analog we’ve been watching for the past 5 months was in serious jeopardy.  Now, it appears those fear may have been misplaced.

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CL just reached our next downside target and should see a substantial bounce here.From our Aug 3 post The Dollar Days of Summer:

Unless it bounces back by the end of the day, CL appears headed for the 1.618 at 40.57.  Interestingly, the timetable seems consistent with our Aug 13 analog target.

Note that this is the 1.618 extension of the bounce from 49.69 in Mar to 64.45 in May.  It also lines up nicely with the white channel .236 line and the falling red channel’s midline. While there is additional downside potential per the falling white channel, this is a solid Crab Pattern [EXPLAINED HERE.] The 1.618 Fibonacci level target usually provides a substantial reversal.

There are several potential upside targets, depending largely on what the Fed minutes have to say.  And, this being the age of head fakes, there is one to consider here.

Continued for members… (more…)

A lower than expected inflation print this morning sent notes higher and USDJPY lower.  Within a minute, however, the PPT had swept in and fixed things. The eminis are showing off 8.50, meaning yesterday’s downside target should be tagged in the opening minutes.

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Yesterday was a great reminder that no matter what the economic news, the “market” is no longer in touch with reality.  Between central banks and the HFT/algos suckerfish that feed off them, true price discovery is a thing of the past.

Yesterday’s 24-pt reversal at 2091.51 had nothing to do with the economy, politics, or the Kardashians.  The diminutive trend line we pointed out at 9:40 (below, in yellow) connecting the eminis’ last two lows was all it took.

It’s an apt intro to this morning’s USDJPY chart.  Despite having fallen out of the rapidly rising white channel, it has somehow managed to stay just north of the rising red channel midline.  In fact, every SPX dip we’ve seen over the past two weeks has prompted a quick retreat to the safety of that bullish refuge.

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The New York Fed reported one of the clearest signs yet that not everything is hunky dory in econ land. In a move that matches the early stages of the 2008 plunge, the Empire Fed Economic Activity Index just plunged to -14.92 (expectations +4.50.)  It’s the biggest miss in over 5 years.

Look for USDJPY to sell off just enough to matter — but, not so much that it reflects badly on the Japanese economy, which had its own embarrassing print last night.  GDP declined at an annualized rate of -1.6%, another signal that Abenomics hasn’t worked, isn’t working, and never, ever can work.  To Abe worshipers, of course, this is yet another justification for the coming expansion of QQE.

ES is currently off around 9 points.  Perhaps SPX will get some follow-through to last week’s elusive target: the SMA200, currently at 2076.54.

UPDATE:  9:40 AM

Gotta hand it to the PPT.  What they lack in integrity, they make up in single-minded determination.  There’s another point or two of downside in ES if that little trend line is to hold.  It currently shows two higher highs and two higher lows.  That’s a trend they usually care about protecting.

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