In our last update [see: Update on Gold, Aug 26, 2016] I noted that GC had come within 2.50 of our 1380 target (from Apr 8) in early July.  After seven weeks of chop, it still hadn’t committed by either tagging the target or breaking down.

The way I saw it, its fate was tied to equities, the US dollar and oil.  If CL rallied, DX could drop and GC was in a position to run up and officially tag 1380.  If, on the other hand, our SPX analog from Aug 3 played out, GC was heading lower.

If our analog plays out, and stocks spike higher over the next few sessions, look for DX to lead the way and GC to tumble — if it’s led by currencies… And, I’d be remiss if I didn’t mention the huge IH&S Pattern, the neckline of which is the former high at 1307ish.  If TPTB are serious about discrediting GC anytime soon, it’ll involve getting it back below that support.

As it turned out, DX was putting in an important bottom that day that would see it rally 8.4% in the next three months.  GC bounced several times at 1307 before finally plunging below on Oct 4, shedding 14% as of today’s lows.DX recently tagged our upside target at 102.098, leaving many readers to wonder whether this is the right time at which to cover short positions.

continued for members… (more…)

Today should be helpful in understanding where, exactly, we are with our analog.  So far, it’s shaping up as a battle between VIX, which continues to be hammered, and CL, which is off another 2.65% so far this morning.

continued for members… (more…)

It’s a repeat of the reaction to Brexit and the US election. Italy’s referendum has triggered all the usual stock propping mechanisms: CL, USDJPY and VIX.  CL officially busted its H&S pattern, USDJPY has rallied over 1% off its lows, and VIX broke down below its rising red channel bottom…again.  The result: the eminis have spiked 27 points higher off Sunday’s lows.

The most startling reaction was the EURUSD, which is improbably higher than before the referendum (but, importantly, has merely backtested the falling white channel it broke down from.)

As the talking heads ruminate over Greenspan’s irrational exuberance comments of 20 years ago, there seems to be little concern about the even more irrational (but, predictable) reaction to fundamentally disturbing events.

A popular website posted the comment this morning “[we] wonder if the ECB has its own plunge protection team.”  I would take that a step further.  What is the ECB, if not a plunge protection mechanism?

continued for members… (more…)

Every once in a while, we get a nice little reminder that VIX, traditionally a reflection of risk in the markets, has become just another tool by which central bankers and their lackeys drive markets.

Early this morning, the S&P 500 eminis were breaking down from a channel established over the past several post-election weeks.  The channel, shown below in purple, was silly enough to begin with.

Had the breakdown been allowed to occur, ES might have dropped all the way to (and, I shudder to think) the SMA20 at 2175 — a 0.4% plunge that surely would have sent investors screaming into the streets.

At precisely the moment that ES was backtesting its broken channel (the yellow arrow)……VIX decided to plummet 13% — dropping through multiple levels of support.  ES, of course, responded by rejoining the (no-longer) broken purple channel and continues to modestly rally, comfortably in the green.

I have a term I use for such instances as this morning’s: a shot across the bow.  It’s a stark reminder to bears that unauthorized declines can and will be harshly dealt with.

It’s no secret that markets are constantly manipulated.  And, it’s never a surprise when VIX is enlisted to nudge prices in one direction or another.  It’s frequently hammered in the closing minutes of a session to allow stocks to close on a positive note.

But, this was a particularly clumsy effort that should make even the most die-hard believer in market purity and efficiency at least a little more skeptical.

Our analog seems to remain on track, with the next gut check coming up on Monday.  Oil has stalled, USDJPY has backed off, VIX has broken out, and futures are showing a modest loss.

Even NKD has obliged, breaking down after tagging our upside target.

If you haven’t taken the time to wade through yesterday’s forecast update, I encourage you to do so.  There’s a lot of information there, and specific targets for the remainder of the year and into February.  For more, see: The Nikkei, Yen and Oil: Joined at the Hip.

Interestingly, I’m seeing more and more mainstream analysts (Gundlach, Gross, Kolanovic) begin to concur with our forecast, though there’s a divergence as to what happens around FOMC day.

continued for members…  (more…)

One of the more laughable charts since the election has been the Nikkei 225 (NKD), which has soared 2,600 points in the face of: (1) the election of a protectionist US president, (2) higher oil prices, and (3) higher interest rates.  Yesterday, it reached our next upside target of 18,631, which puts it roughly 25% higher since our Feb 9 bottom call [see: Update on NKD: Feb 9.]

When the Fukushima Daiichi disaster resulted in Japan’s nuclear power plants being shut down five years ago, oil and gas imports became even more critical to Japan’s energy needs.  Energy costs spiked higher, impacting consumers and businesses alike.

What wasn’t spiking higher was the Nikkei.  The correction in the summer of 2011 was turning into a rout.   Were it not for the yen carry trade [click for an explanation] and the floor the BoJ put under the USDJPY, we might well have seen the next leg down of the 2007-2009 crash.

Instead, the Bank of Japan — in coordination with the FOMC — crashed the yen.  It saved stocks.  But, as the yen plunged from 75 to 105 (per USD), Japan had a different kind of problem on its hands.  Rising oil prices (priced in USD) were being exacerbated by the yen’s plunging purchasing power.

The BoJ, which had used the threat of deflation as the rationale for unprecedented quantitative easing, found itself with increasingly noticeable and rather inconvenient inflation.

The only solution was to crash oil prices.  Other central banks, which were similarly committed to higher equity prices and, by now, understood the importance of the yen carry trade, were eager to join in.

This began a symbiotic relationship between USDJPY, CL and NKD that continues to this day.

1. The day that USDJPY broke out of a lengthy consolidation in Aug 2014 was also the day that CL broke down.
2. When USDJPY broke down on Feb 11, 2016, oil bottomed and began a rally that would see it double by October.
3. USDJPY’s bottom on Jun 24 closely followed CL’s Jun 9 top.

The Feb 2016 role reversal was one that caught a lot of investors off guard.  I covered it extensively at the time [see: USDJPY Finally Relents.]  The entire oil complex, the banks which financed it and the countries which were supported by it were on the ropes.  The cheap yen was increasingly a problem.  It was time to put a floor under oil and crash the USDJPY.

By Jun 24, USDJPY had shed 20% and CL had gained 96%.  Algos loved (ok, were programmed to love) resurgent oil prices just as much, if not more, than they did the crashing yen.  And, of course, the steadily falling USDJPY (appreciating yen) made higher oil prices tolerable for Japan.

By now, you might be wondering what all of this has to do with…well, anything.  It’s very simple.

We called a top for oil on Oct 11 [see: Welcome to Peak Oil.]  We were rewarded with a 19% drop that has since rebounded by (a Fibonacci) 88.6%.  Yesterday, OPEC struck a deal which they insist will drive prices to new highs.  Putting aside, for the moment, the considerable hair on the deal, there are some serious problems with higher oil prices.

For one, central banks don’t need higher inflation in the same way they need higher stock prices [see: Japan’s Equity Trap.] They might say they do, and in certain cases it might even be beneficial.  But, higher inflation brings higher interest rates and the need to moderate ZIRP and NIRP.   Remember last year when the FOMC raised rates just a little?  Stocks didn’t like it one bit (NKD sold off 24% in under two months.)

With global debt having spiraled out of control over the past seven years, appreciably higher interest rates would put a serious dent in most countries’ ability to remain afloat.  The US government, for instance, with $20 trillion in nominal debt (much more off the books) faces a $200 billion hit with every 1% across-the-board increase.

Where, exactly, is that money supposed to come from?  Certainly, not courtesy of the lower tax rates Mr Trump has promised.  And, I’m not laying the blame at Trump’s feet.  The money is simply not there unless politicians take a huge carving knife to our current budget.

Japan, Europe, China…it’s just as bad, if not worse, everywhere else.  Higher rates are simply not acceptable.  Bernanke wasn’t joking when he said, in May 2014, that he didn’t expect interest rates to ‘normalize during [his] lifetime.”  So, one would expect central banks to continue doing whatever is in their power to avoid them.

This, of course, brings us back to the oil “deal” and why, even in the face of a rip-your-face-off rally in oil, we remain short SPX with our downside targets unchanged.

continued for members… (more…)