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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Less than 24 hours to go for the BoJ decision, and about 30 for the FOMC’s.  And, equities are ramping again in eager anticipation of a non-event.  QE, QQE, ZIRP, NIRP, ETF purchasing, VIX, CL, TNX and currency manipulation got us here.  Without them…well, the “market” would rather not think about that.

Kuroda and Yellen are stewing in that knowledge this morning — keenly aware that the whole house of cards could collapse if they do the “wrong” thing — whether or not the economic circumstances dictate.  VIX’s manufactured sleeper of a decline belies the fireworks just ahead.

So, we’ll take a look at the upside and the downside cases this morning — laying out specific targets representing good, bad and ugly scenarios.

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I chart DX every day and post an update more often than not.  But, with the FOMC and the BoJ both meeting this week, it seems like a good time to look at the big picture for the greenback.

Last May [see: Update on DX: May 6, 2016] we noted that DX was at a crossroads.  Its future depended on whether CL or USDJPY would step up and fuel stocks’ next leg up.

If you believe CL will break out again and deliver SPX to new highs, then DX breaking down here would make perfect sense. If, on the other hand, the BoJ has seen the folly of its ways and is about to breathe new life into the yen carry trade, then DX will surely break out.

As it turned out, USDJPY stepped up to the plate and rallied through the remainder of the month.  And, after a few days of waffling, CL rallied through June 8.  So, DX broke out, but only rallied through the end of May when USDJPY topped out..  At that point, it bumped up against the top of the falling white channel and spent the next several weeks backtesting the gray channel from which it had broken out.

As the chart above shows, DX took the 2nd backtest on June 23 and used it to form the bottom of a rising channel (white) that has since guided prices higher.

The following day saw DX rally 3.95% after the Brexit results came in, lifting it up and out of the falling white channel as well.  By the time it got done rallying, that rising white channel was looking pretty solid.  But, is it?  Can it maintain its momentum if the FOMC doesn’t raise rates?

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With both the Fed and the BoJ meeting Tuesday and Wednesday, huge currency moves are almost certain.  With them, the potential for huge equity moves is quite elevated.

It has been 10 days since I released an alert [see: Psyops and the FOMC] that stocks were at a critical support level.  The S&P 500 has tested that support three times since then, while central bankers have repeatedly shoe-horned the dollar higher and VIX lower.

Were they forcing DX higher in anticipation of a disappointing FOMC decision?  The next several days will be a crap shoot, with lots of opinions but little certainty about what to expect.

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We’re entering the crap shoot phase of the “market” now, with bets being placed on next week’s central bank actions driving most of the action.  The big development this morning is the EURUSD, which was finally allowed to break down.  It should have occurred last week after the ECB stood pat on additional easing.

But, of course, central banks have an aversion to prices tumbling as they’re pontificating.  Kinda makes them look bad.  Draghi is no exception – hence the after effect fireworks.  And, to be more precise, you’d have to say the propping up really dates back to late June, when EURUSD inexplicably rallied after its Brexit tumble.

The big beneficiary, of course, is the USD, which moments ago broke through its SMA50.  But, futures are still negative, for obvious reasons.  This morning’s inflation figures suggest a rate hike is needed.  In this case, what’s good for the USD isn’t going to help stocks.  At all. (more…)

CL finally reached our downside target range yesterday [see: Oil Makes Its Move.]  The drop had been postponed for over two weeks, but is just as meaningful.  How it responds from here will drive equity prices through at least next week’s FOMC meeting.

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The news has been pretty awful for oil over the past few days.  But, it’s been stuck at its SMA50 because to go lower would have meant a drop below critical support for SPX. With yesterday’s lame breakout of USDJPY, however, CL finally has some cover while it tags its own important support — which could set the stage for a real bounce.

Of USDJPY and CL, only one can really bounce.  Higher oil prices are incompatible with a lower yen.  It’s part of the deal between the BoJ and FOMC.

They are allowed to bounce at the same time for only a short period in order to, say, ensure SPX doesn’t make new lows.  We saw this yesterday when USDJPY spurted higher, breaking out of a falling channel on a recycled news story in Nikkei (about even lower negative rates) that was released the very minute SPX needed propping up.

It halted SPX’s decline at 1.15 above Monday’s lows.  It’s about all central banks can do, anymore — which is a little scary.

As the past several sessions illustrate, the corner into which they’ve painted themselves is getting tighter and tighter.

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Holding the white channel bottom is the key.

Again, made possible by USDJPY’s breakout.

Equity charts for the day:  ES might be able to hold the red channel bottom.  But, if it breaks down, it will be so SPX can make a nominal new low that establishes a C wave to go with its A.

I think this is what they were going for yesterday when the Nikkei story hit.  Recall that the bounce was extremely lackluster, and never got close to breaking out.

My guess is they’re waiting for the EIA inventory report at 10:30 ET, at which point we’ll get a very quick spike down to CL 41.37 – 43.50.  SPX might or might not make a nominal new low depending on how fast it happens.  But, I think they’ll have CL bounce higher after finding support, which should allow everything else to recover and USDJPY to resume falling.

It’s a little convoluted, I know.  But, that’s what I expect.

UPDATE:  10:18 AM

SPX is testing its SMA100 again, with the SMA5 200 just above.  This would be a good place for a reversal if CL takes much of a dive.  On the other hand, it would be great place for a breakout.  I’d try a short position here with tight stops.

The tricky part is VIX, which can prop things up pretty easily with even a slight dip below the SMA200 at 16.72.

UPDATE:  10:37 AM

Inventories decreased 600K barrels versus last week’s 14.5M.  It’s mildly bullish for oil — which ran up to tag the falling red channel top and seems to be stalling there.  For its part, SPX was buoyed by VIX dipping below its SMA200 and a TL off recent lows.  It spurted up past the SMA5 200 (2136.65), where it will potentially backtest it as the SMA5 10 comes along in 10 minutes or so.

This is pretty much backwards of the sequence I expected, but it might turn out anyway.  Keep an eye on VIX and the white TL.  A rise back above it and the SMA200 would be a signal of lower stock prices to come.  Otherwise, we’ll get the backtest mentioned above and not much more.

FWIW, ES just reversed off of overhead resistance — the purple TL.

UPDATE:  11:18 AM

So far, so good.  VIX is back above its SMA200……while SPX is back below its 2015 highs and the SMA5 200. CL is continuing lower.  While, USDJPY is diving nicely……and even DX is cooperating.  If it were to drop through the support zone at 95.22ish, things would accelerate to the downside. It’s still unclear whether or not we’ll get a new low.  CL is probably nearing its downside potential.  Though, the bottom of its rising white channel was fairly tough to place with any certainty — thus the large downside target range.

UPDATE:  12:17 PM

CL is inching lower and DX is poised to do likewise.  But, VIX is propping up SPX by loitering at its SMA200 — switch they can throw any time SPX starts to dip.  I’d revert to cash here, as it seems unlikely to make any lower lows for now. If VIX bounces back above the SMA5 200 at 17.11, I’d look at shorting SPX again.  But, I’d hold off on a long position until CL reverses.

I hesitate to cover the short, as I still believe in the premise of a drop to either new lows or, at least, the white TL down around 2128ish.  But, with VIX sitting right there ready to drop like a rock, it’s hard to feel comfortable with a short position.

Note that while NKD broke down through its latest white TL, it has just about reached the .886 shown below.  So, they could be setting it up for a rebound.

UPDATE:  12:39 PM

I’ll take another crack at a short position down to the white TL (2129ish.)  Probably a waste of time, but VIX seems to be getting a bounce and NKD is slumping a little.

The key will be VIX getting past the SMA5 200 at 17.10.

UPDATE:  2:24 PM

Making progress toward a new low.  ES just reached its SMA10, so that will be a challenge getting below it.  Should get a bounce somewhere in here as CL is almost to its white channel bottom.

At this point, I’d say CL is low enough.  The only remaining question is whether or not SPX wants to make a new low.  Since nothing is spiking higher, and VIX is still above its TL and SMA5 10, and NKD is still below its .886, I’d say yes, they’re setting it up for new lows.  It’ll likely happen right away, at the close, or first thing tomorrow morning.

While it will be gratifying if it happens, it is likely to leave us with the issue of holding overnight.  New lows into the close is frequently a bear trap — triggering stops who then get creamed when it gaps higher the following morning.

UPDATE:  2:55 PM

Probably just a head fake, but VIX is dipping lower and NKD is testing resistance.  Odds are they’re just trying to get a SMA5 20 tag before another leg down, but I’d take profits here and reopen the short if it reverses after the top of the hour.

UPDATE:  3:00 PM

One last shot at a leg lower.  If it does dip more, it’ll probably be CL, which looks like it wants a little deeper retracement before what should be a strong rally.

UPDATE:  3:32 PM

I’m not sure if we’ll get new lows or not, but this is close enough IMO — especially with VIX settling toward the white TL again.  Back to cash for the night, though if VIX started spiking I’d give some thought to shorting again.  And, if SPX makes a slightly lower low and VIX starts crashing, I’d sure think about going long for the bounce.

UPDATE:  3:50 PM

Probably nothing, but we could get another leg down from this little backtest.  Back to short with very tight stops with a target of 2119.  If it doesn’t start down right away, I’d blow it out.  I have no interest in holding overnight — even if it dips to 2119 and keeps going.

UPDATE:  3:59 PM

Covering.  I think we’ll get a little more in the morning, but can’t see making that bet overnight.  I have to run out for a little while, will post more later this afternoon.

 

After collecting 64 points on last week’s short and 39 points on yesterday’s bounce, the past week has delivered over 5%.  I was gradually getting more comfortable with our swing positions, and yesterday felt a lot like many past melt-ups that barely paused — let alone corrected on their ascent.

But, a little voice in the back of my head kept whispering “backtest.”  Seeing that S&P 500 futures are off over 17 points, I’m glad I listened yesterday afternoon and booked profits from our long at 2120 rather than holding overnight.

This is exactly the sort of overnight move that has made swing trading so difficult.  Big gains during the day often mean gaps down overnight.  And, vice versa.  It’s a by-product of the constant manipulation of currencies and futures which has expanded over the past 5 years.

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Friday’s sell-off came a day earlier than originally expected and pushed past our initial target by a few points.  But, of course, it was long overdue in a general sense — adding to the general sense of panic that would otherwise never be associated with a 2.4% dip.

We saw futures continue lower yesterday, testing 2100 before a sharp upturn this morning.

To be clear, there is a real risk of the Fed dropping the ball here.  They’ve done it before, and they’ll do it again.  If all depends on what happens when SPX tests our secondary target: the SMA100 at 2120.

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