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SPX reached our second downside target yesterday after the rising channel from Tuesday broke down at 1960.  It was clearly headed for 2138 when DB intervened.

This is not a gimme, and is complicated by the fact the we have lots of potential support between here and there: e.g. the white .786 and .886 at 2148.20 and 2145.09.

It got a reversal and 15-pt bounce on Deutsche Bank’s recovery back above 11.45, confirming DB’s role as a new leading indicator for stock prices.

Futures fell another 8 points after the close, only to recover 16 points as DB, CL and USDJPY all bounced after hours.  What real live investors took away, overnight, low-volume ramp jobs have once again restored.  Is this a great “market” or what?

USDJPY, for example, dropped to our red TL, but not until after the close (and rallying 80 pips into the Japan open.)

This morning, ES is up 5 points, leaving SPX in limbo.

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With investors anxious over the meltdown of some of the biggest and systemically riskiest banks in the world, the “markets” needed some distractions.  First, Deutsche Bank rescue rumors started circulating, offering a little hope re our 2178 upside target.

DB is up 7.7% off its lows, and 4.7% since our bottom call, so everything must be okay.  If CL and USDJPY cooperate by breaking out of their triangles, it will be.

But, stocks were still slipping.  Perhaps investors questioned the DB deal, since Merkel had sworn, the day before, that Germany wouldn’t rescue it.  About that time, the EIA crude inventory report was released.

After an initial spike, oil broke down through the bottom of its triangle.  I considered pulling the plug on our SPX upside target, but settled for revising it down to 2171.

Then, quite by coincidence (not), the WSJ flashed a headline that the oil ministers meeting in Nigeria had a deal.

“OPEC reached an understanding that a production cut is needed to lift petroleum prices…but, the Cartel will wait until November to finalize a plan to tackle a supply glut that has lasted longer than expected.”

Any formal agreement?  No.  Firm production limits?  No.  Timeline?  No.  The deal is about as solid as a New Year’s resolution to spend more time at the gym or cut back on drinking.

But, the algos love this kind of stuff.  CL popped almost 7% off its lows, and SPX went up and tagged 2171 seven minutes before the close.  All’s well that ends well.  Or is it?

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With Deutsche Bank soon to be the beneficiary of both a fire sale and a government bailout, and the Saudi’s reportedly having become besties with Iran, last night’s 10-pt swoon in the futures has been erased.

DB is up 7.7% off its lows, and 4.7% since our bottom call, so everything must be okay.  If CL and USDJPY cooperate by breaking out of their triangles, it will be.

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We’ve talked about DB’s dangerously leveraged position.  From yesterday’s Trouble Brewing:

Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.  With Tier 1 capital of  €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%.  In other words, a minuscule 0.11% decline in the value of DB’s OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they’ll tell you the exposure isn’t that great, that almost all of their positions are offset by other positions — what they call “netting.”  Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn’t the same as eliminating the exposure.

For a sense of scale, €41.9 trillion in 100 euro banknotes laid end-to-end would almost reach Mars.  So, it’s a relatively big number.  As I’ve shown in previous posts, DB isn’t exactly an outlier amongst its TBTF peers in this respect [see: Banks’ Wipeout Ratios.]

But, I try not to pay too much attention to fundamentals.  In fact, in my 35 years of investing, I’ve never seen a bigger gulf between fundamentals and price action.  Let’s look instead at DB’s charts, which aptly illustrate the importance of the current stock price.

Special thanks to consulting client A.C., which asked me to evaluate DB and authorized me to share these charts very quickly after delivering them.

The close-up daily chart shows support at the bottom of a falling channel (in red) that dates back to Feb 9, about the same time that oil bottomed.  Makes me wonder what their oil exposure is…

If we pull back a little, we can see a larger falling channel (in purple) that contains the red channel.  Its bottom is much lower than current prices.  It’s not an outstanding fit, except for the fact that we have two good tags on its top and several on its midline — including the last downturn on Sep 9.  This is the channel TPTB don’t want to see play out.Last: the big picture, which illustrates how critical holding this morning’s low of 11.23 is.  If this channel dating back to 1998 breaks down, all bets are off.  The purple and gray channels take over, and DB goes the way of Lehman.  Of course, if that should happen, it won’t be the only bank going down the tubes.  Lots of counterparties amongst that $47 trillion in derivatives.

So, to answer the question “will Deutsche Bank survive” we have to ask:

1. Are TPTB paying attention to these charts?  Based on the fact that every previous approach to the channel bottom resulted in a bounce, I’d say yes.
2. Are they willing to do what it takes to allow a bounce here?  We got a hint, today, when stocks were slipping toward the May 2015 highs (yes, again) and a well-timed blurb appeared in the financial press stating that the $14 billion fine might be reduced if DB “cooperated.”   The algos love that kind of stuff.

Fifteen years ago, I took some time off from Wall Street to try my hand at writing and producing film.  It might seem thoroughly unrelated from technical analysis, but it’s not.  I’m firmly convinced that much of what happens in the “markets” these days is scripted.

If you want to know what’s going to happen next, it often helps to ponder what you would do if you were charged with propping up the markets — the unwritten mandate about which central bankers care most.

I don’t think it’s overstating matters to say that Deutsche Bank’s failure would create another Great Financial Crisis.  I’m pretty sure the Fed, ECB, BoJ, BIS, and SNB know this.  And, I’m pretty sure people at each of those organizations have shown charts similar to mine to their respective bosses [if not, might I humbly suggest a subscription?]

So, I’m pretty darn sure TPTB will step in and prevent DB from making new lows.  This makes it a “buy” here at 11.23, but with tight stops for obvious reasons.  Initial price target: 12.42 (+5.4%), followed by 13.02 (+10.5%) and 13.98 (+18.7%.)

Stay tuned.

SPX nailed our first target yesterday, and came within inches of our second.  After the close, the futures collapsed and finished the job, only to soar after the debate results suggested that FOMC members didn’t necessarily need to start polishing their resumes.

However, the news cycle came roaring back overnight.  Deutsche Bank apparently didn’t go away.  Oil producers have no interest in capping production.  And, Japan is still a mess.

SPX is likely to tag our next downside target without any difficulty.  The question is whether or not it will stop there.

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All eyes are on Deutsche Bank and Turkey this morning.  It’s been a while since I calculated wipeout ratios [see: Banks’ Wipeout Ratios], but DB is in worse shape than any of the other banks I looked at last year, with the possible exception of Goldman Sachs.

Deutsche reported OTC (not total) derivatives in its 2015 annual report of €41.9 trillion, about $47.3 trillion in USD.  With Tier 1 capital of  €48.7 billion, this works out to a multiple of derivatives to Tier 1 capital of 861, or a wipeout ratio of approximately 0.11%.  In other words, a minuscule 0.11% decline in the value of DB’s OTC derivatives portfolio would wipe out all of its Tier 1 capital.

Like every other bank, they’ll tell you the exposure isn’t that great, that almost all of their positions are offset by other positions — what they call “netting.”  Of course, we learned from Lehman, AIG and Bear Stearns that netting out the exposure for balance sheet purposes isn’t the same as eliminating the exposure.

Turkey’s downgrade…what can you say?  Turkey’s a perfectly nice country with lovely people…and, an evil crackpot at the helm.  As we discussed in July [see: Turkey Sinks to New Lows], this was only a matter of time.

This latest action, however, will turn the markets on Erdogan.  With no one to bully, hold accountable or throw into jail until he gets his way, this will cost him dearly.  Unfortunately, it will be the citizens of Turkey who ultimately pay the price.

With the futures off 10 points and USDJPY and CL testing support again, one gets the impression that the rally is hanging by a thread.  That might be a slight exaggeration – but, only slight.

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On Aug 30, with USDJPY at 102.47, we put a target of 104.24 on it, noting that it represented the top of a well-established channel and a key Fib level.

USDJPY obliged by tagging our target three days later, then reversing as expected.  At the time, there seemed to be considerable downside potential.  A client who actively trades the USDJPY asked for downside targets, and I posted this chart on the 6th.

We were almost immediately rewarded with a drop to 101.19, “d” on the chart below.  The subsequent backtest came very close to tagging “c.”  Everything was going really well.

Then, all of a sudden, it didn’t.  Nothing was happening.  USDJPY headed in the general direction of target “e”, but reversed on the 12th at a point that created a new, rising channel.  For another week, USDJPY angled higher, buoyed by suggestions that the BoJ would increase its easing.

I didn’t’ believe the suggestions, as the BoJ has painted itself into a corner with respect to NIRP and currency devaluation.  As the latest policy meeting approached, I added some downside targets that equated those original targets “e” and “f.”

The announcement was as obtuse and delusory as anything Draghi might have dreamt up.  But, cutting through the BS, there would be no additional easing — only an attempt to steepen the yield curve.  As it loves to do, the BoJ forced USDJPY higher in a self-congratulatory spasm, breaking out of the extension of its original falling channel.

Holding short during that 30-minute, 1.77 spike would have required nerves of steel.  And, that was the point, right?  Stopping out those of us who saw the downside case as being obvious?

By the time the dust settled, those price levels were as accurate as could be — even if it took a little longer than expected.  Total move, from 102.47 up to 104.24 and down to 100.09: 5.92.  A very nice 3-week return.  And, though it took more than a little patience, it was worth every sleepless night.

With the ECB, BoJ and FOMC all having trotted out their brilliant plans for a recovery (what’s the hurry…it’s only been 9 years?) we’ll take a look at what to expect next.

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With our latest forecast well on its way to proving its worth, I’m going to take the day to catch up on some of the secondary charts that have been woefully neglected.  Today, the focus is on oil.  Will there or will there not be an agreement to cap production?

Reuters suggested overnight that it was practically in the bag as long as Iran played ball.  This morning, we’re hearing that Iran has no interest whatsoever until their production has reached pre-sanction levels — if then.

After tagging our downside target twice in the past several weeks, oil is making a bid to break out of its latest falling channel.  Since it’s integral to our equity forecast, I’d keep a close eye on it today.

Here’s a quick roundup of the other charts I’m watching.

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Critics are roundly denouncing the Fed’s latest failure to launch as gutless, feeble-minded insanity.  And, they’re right.  There will come a time when the folly of not doing more to stave off the inflation part of stagflation is obvious.

But, for now, the only data they’re dependent upon is the “market.”  And, all the major futures and currency pairs we watch are responding exactly as expected.  The weakness in equities over the past several weeks was all about holding the Fed’s feet to the fire.  With SPX perched on the precipice of critical support, a rate increase was most unlikely.

As I wrote several days ago in What to Expect:

By keeping stocks at or near support, they’ve made the Fed think.  And, if they’ve played their cards right, they’ll make the Fed flinch.  At a few points above last year’s highs, there is no room for a decline.  Any decline.  They sacrificed a few months of rising stock prices for a few more months of ZIRP.

Looking at targets this morning…    USDJPY didn’t waste any time in tagging our next downside target, leaving it in another make it or break out position.

Congrats to those of you who hung in there for the payoff.  To those who didn’t, repeat after me: “USDJPY is only a tool.  USDJPY is only a tool…”

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As we expected, the BoJ left QQE largely unchanged.  Rates are unchanged, except for a yield curve twist that could marginally steepen the curve.  The amount of money being thrown at stocks/bonds remains unchanged except that the TOPIX will be emphasized over the Nikkei 225 (at least until they own most of the TOPIX too.)

From our base case in yesterday’s post What to Expect:

The BoJ and FOMC both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.  EURUSD will drop through its SMA200 and CL will rally strongly enough to keep stocks on the rise… USDJPY will sell off initially, reaching 100.50 or 100.08…

Things went pretty much as planned.  Oil and NKD spasmed higher.  The EURUSD plunged below its SMA200.  And, after the initial self-congratulatory spike, USDJPY nailed our next downside target — though it really took some patience (and, nerves!) to see it through.

Next, we’ll find out if the FOMC can be as accommodating (pun intended.)

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