For now, it appears as though the Fed won the battle without having to fire a single shot.  Expectations of a September hike have doubled, the US dollar has pulled out of its nosedive and futures are back in the green (by 1 point, but green.)

To the casual observer, it would appear that they must have all the right answers.  Of course, the real culprit for all things bright and beautiful is the yen, which was monkey hammered on more Kuroda gobbledygook about massive QQE expansion.

Whether he will or won’t — who knows?  But, the USDJPY spiked higher and NKD is back above the ominous TL below which it broke last week.

This, of course, is even more an illusion than the dollar’s strength, as the buying was done by the BoJ itself — not “market” confidence in the wisdom of its policies — which are piling ruin upon Japan’s already bleak future.

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When we looked at gold last April, we saw upside potential to 1380 [see: Update on GC: Apr 8, 2016.]

If it breaks above 1246, then the purple .618 at 1257 is a gimme.  From there, we have potential resistance at 1270, which is also about where the purple midline currently resides.If it breaks above the purple midline, then 1379-1380 is the next logical target, perhaps in Sep/Oct.

Gold got to 1377.50 last month, and hasn’t been able to push higher since.  Here’s the same chart as last April, with the chart patterns and price action extended to today.

It’s trading right now at 1325, about 4% shy of our target.  Does it still have the potential to move higher, or were July’s highs it?  And, the Federales‘ comments from Jackson Hole — do they give us any clues as to what to expect?

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Will they, or won’t they?  Even under tenacious grilling by the MSM, the Federales haven’t given much guidance as to whether they’ll hold the line in September.  We have our own thoughts on the matter, which informs our analog [see: A New Analog: Aug 3, 2016.]  It’s still (drumroll, please) on track.  But, today marks one of those inflection points that will make it or break it.

SPX came within a few points of our next downside target yesterday, held at bay by USDJPY, which kept threatening to break out beyond this totally meaningless TL — a charting straw man if ever there was one.

And, of course, CL got in on the action — ramping just a little higher every time SPX ticked down a little.  Its former falling red channel is now a distant memory.  And, it’s back to playing cat and mouse with its SMA10.

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We’ve seen a lot of interpretations of the bad news/good news story over the past five years.  We’ve become inured to the idea that bad news is good, because it ensures continued central bank easing — which is supposedly good for the “markets.”

So, with ever louder cries for rate and policy normalization, and all eyes on the Jackson Hole confab, it’s not too surprising that the futures aren’t loving this morning’s strong durable goods beat.  There was a lot under the hood on this report, namely:

• Durable goods new orders +4.4% vs 3.3% exp.
• New orders ex-transportation +1.5 vs 0.5% exp.
• Non-defense cap goods ex-aircraft +1.6% vs 0.3% exp.

While it was a nice month-over-month beat, the year-over-year comparisons were atrocious:

• Durable good orders -6.4% (2nd big annual drop in a row)
• Capex shipments non-def, ex-aircraft -9.5% (unadjusted)

The futures are off across the board, with CL notably well on its way to our downside target and stocks likely to follow.  Our downside targets from last week and our Aug 3 analog remain in place.

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With oil on track to our downside target, it suddenly shot up 4% from its overnight lows on rumors which were immediately proven false while failing to drop even a little on quite bearish API inventory.  What else is new?

While SPX broke out of the tightest falling channel it had going, it still failed to make new highs.  This says a lot about the kind of “market” we’re in now.

Our analog continued on track, with the biggest current question being where the next rise begins from.

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Last December I slapped a couple of upside targets as well as a downside target on the NYSE index and pretty much forgot about it [see: Update on NYSE Dec 29, 2015.]  I’m not a fan, as it regularly ignores chart and harmonic patterns.

But, at the time, a large H&S Pattern promised significant downside if NYA wasn’t able to break out.

If… it can’t break out of the red channel, then the bottom of the rising white channel could be called upon to support it a third time in only 4 months (about 9940) with the neckline of a huge H&S Pattern (in yellow) waiting below at about 9640.  The H&S targets 7800, but the more likely target is…9040.  It would allow NYA to put in a higher low that’s in line with the falling red channel bottom.

Five sessions later, NYA plunged through the white channel bottom, followed in short succession by the yellow neckline.  By the time the dust had settled, NYA had reached 9040, and even overshot it a bit.  All in all, it was a 21% correction from the May 2015 highs.

What next?

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It was a pretty quiet night, yet the futures still managed to levitate 15 points off their lows for no particular reason.  CL continues its decline, and is about 2/3 of the way to our downside target.  USDJPY, which hugged the underside of a rising TL all day yesterday, broke down overnight.  And, VIX is just a mess.

The problem is the Nikkei, which spiked 130 points last night, only to almost immediately plunge 215 points before returning to its starting point.  Talk about mixed signals…

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We’ve been watching the effects of “oil gone wild” with great interest, especially since Aug 3 when it tagged our downside target and began its latest 25% spike.  As we discussed at the time [see: The Not So Invisible Hands Guiding the Market], it has been TPTB’s primary tool for pushing stocks higher since the yen carry trade started fizzling in Jan 2016.

Note: Our membership special ends this Thursday, Aug 25.  $299 gets you three months of full access as well as charts on the security/index of your choice.  This offer is limited to new members and former members whose subscription has lapsed.  For more details and to sign up now, CLICK HERE.

The impact of CL ramps has been moderating, though.  Apparently, even the algos understand there is an upper limit to this game.  CL reached 49.36 on Friday, just a smidge below our 50 target.

The big question now, is whether it can properly flesh out something resembling a channel, and backtest the large white channel it left behind on the 16th.

We remain short on SPX, with Friday’s targets still in place.

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In our last major update on bonds [May 24, 2016 Update on Bonds] I detailed the brokenness of the bond market’s relationship with stocks.  At the time, TNX was looking rather vulnerable.

[TNX] has since put in two lower highs — hardly the sort of behavior one would expect if higher rates are, indeed, right around the corner.  On the other hand, it’s hard to miss the triangle pattern setting up over the past several months.

IMO, it’s not so far off the lows that it qualifies as a legitimate pennant pattern.  But, it obviously represents a coiling of sorts — exactly the sort of pattern one would expect with a rate decision coming up next month.

The Fed punted in June, and again in July.  There was always something a little too scary lurking in the bushes: disappointing employment figures, Brexit, the latest Kardashian drama.

In the July minutes released last week, we saw that the Fed wants both “great taste” and “less filling.”  They want investors to believe them when they say a rate increase is really, really, really on the way.  They just don’t want to ever have to deliver on that threat.  And, it makes sense, in the kind of logic that only a central banker could appreciate.

As a nation that imports almost everything, the US needs the dollar to remain high.  The best way to do that (without having to resort to currency manipulation) is to maintain interest rates that are higher than those of other developed countries — not hard to do, when many of them are below 0%.

Should investors begin to doubt your resolve to maintain those spreads…well, that’s what CNBC is for, right?  So far, talking about higher rates has been just as effective as having higher rates.

Good thing, too, because we can’t afford actual higher rates.  With $19.4 trillion and counting in direct Federal debt, we can’t even afford the ridiculously low rates we have. Take 2015 for example.  We ran a $500 billion deficit with 2% interest rates.

Which other $450 billion in spending could we eliminate if rates tripled to a historically normal 6%?  Hey, maybe we could just raise taxes.  It’s only an extra $1,200 annually for every man, woman and child.  Ain’t gonna happen.

It seemed rather far-fetched when, in May 2014, Bernanke was quoted as saying fed funds wouldn’t normalize in his lifetime.  Now, it seems positively near-fetched.  The Fed has spent years threatening — but never delivering — higher interest rates (unless you count last December’s 0.25% increase, which scared the crap out of the FOMC.)

The inflated dollar helps (along with a definition that changes as/when necessary) keep reported inflation at bay — which is critical when you’re trying to convince folks that accommodative policy is essential in order to increase inflation (supposedly a good thing.)

Otherwise, investors might get the silly idea you’re doing it just to prop up stocks.  I mean, how ridiculous is that!?

Okay, so what does all this have to do with ten-year interest rates?  I’ve been trotting out the chart below for years, noting how the traditional relationship between interest rates and equity prices broke down in 2014.

In our May update, however, I pointed out that the traditional relationship had finally been restored.  That is, a plunge in interest rates had accompanied a plunge in stock prices — just like the good old days.

Hope you enjoyed it while it lasted.  Because, when the pennant pattern broke down in early June, stocks didn’t — at least, not for long. The plunge from 2% on Mar 16 to 1.34% on Jul 7 matched up with a 3.6% increase in SPX.  

But, even that statistic obscures an intriguing movement in rates that has important implications for bonds going forward.

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We’ll start with a peek at the Big Picture posts for each month so far this year, and wrap up with a look at what to expect going forward.

The Big Picture, January 5, 2016

On Jan 5, I was focused on the fact that USDJPY had dipped below the critical Fib line at 120.11.

Did you feel it? Something big happened yesterday, and it had nothing to do with China, Saudi Arabia, Iran or Donald Trump. Of course, I’m talking about USDJPY, which closed below the key Fib line at 120.11. Is it important? Well, the last time it dipped below this level, stocks were in the midst of a 12.5% plunge.

With SPX at 2020, I identified two important levels of support: 1984 and 1962.

With USDJPY below 120.11, and CL potentially plumbing new depths, 1962 should be doable. After that, we’ll have to see what tricks TPTB can come up with to maintain the purple channel. If they don’t, then we’re obviously in for much more downside than we’ve seen in a long, long time.

The following day, SPX dropped below 1984. The day after that, SPX plunged through 1962 and didn’t stop until it reached 1812 — a 12.9% (versus 12.5%) drop from the end of the year highs.

The Big Picture: Feb 8, 2016

By Feb 8, I was on crash watch. USDJPY had dropped below the bottom of a huge, 15-month old huge channel, with devastating results for stocks.

Now, as USDJPY drops through the channel bottom again, the “market’s” fate rests on whether or not the central planners will elevate the USDJPY yet again.

SPX, already down nearly 15% from its peak, had completed a huge Head & Shoulders Pattern that threatened to send the index tumbling another 17%.

When the FOMC increased rates two days later, it completed an even more bearish H&S Pattern. On Feb 11[see: USDJPY Finally Relents], I wrote:

USDJPY, along with CL and SPX, should bounce here. If you’re a bull, they must bounce here. The only question: is it too late? [Keep] an eye on CL, USDJPY and NKD for signs of a turn. You’ll know, because all three will be screaming higher.

CL, USDJPY and SPX all reversed sharply that day. CL screamed 50% higher (currently about 100% higher) in about five weeks, producing a 12% rally in SPX and a 17% rally in NKD. It was a massive, highly successful intervention that cemented CL’s role as the primary driver of stock prices. I set a target at 2000 for SPX by Mar 12.

The Big Picture: Mar 14, 2016

SPX had already reached 2000 by Mar 4, over a week ahead of schedule. The FOMC and BoJ were both due to announce next steps the week of Mar 14.

And, now we face the question of whether SPX will reverse strongly or merely take a breather here. With Kuroda announcing any BoJ policy changes tomorrow and Yellen doing the same on Wednesday, “markets” remain in the hands of the central planners. Wouldn’t it be nice if they’d just publish future stock prices while they’re at it?

Given their success in rallying SPX off its Feb 11 lows, it seemed they were more likely to break out than down. I placed targets of 2050-2065 around Apr 1 and 2087 (later increased to 2098) by Apr 22.

The central banks obliged. SPX reached 2065 by Mar 30 and 2087 by Apr 18. SPX topped out two days later at 2111, 13 points beyond our upside target.

The Big Picture: Apr 27, 2016

This was another post centered around the coming FOMC and BoJ actions. SPX had managed a rather extreme rising channel that was built entirely on CL and USDJPY intraday rallies. But, I had little faith in the BoJ’s ability to keep the USDJPY rising.

That’s probably about it for this leg. If you’re a contrarian and can hedge overnight and don’t believe BoJ has any ammunition left, this would be a great place to short. I still believe the yellow .786 at 2065 is in play…

If there’s a silver lining for bears, it’s that tilting the rising red channel over a bit theoretically presents an opportunity for a backtest of the SMA200 down at 2014 (the red dot above.) Though, it sounds ludicrous to talk of a 73-pt drop in the next day or two.

The following day, the BoJ Screwed the Pooch, and SPX began a 3-week decline to 2025, not quite to the SMA200.

The Big Picture: May 5, 2016

On May 5, I focused on a potential bottom for SPX, identifying a backtest of the broken white channel at 2039 as the most likely scenario.

It could happen any time between now and then, and it could even wait until Friday or Monday. But, the point is to backtest and, thereby, firmly establish support in order to legitimize another push higher.

SPX bottomed at 2039 the following day, then bounced 81 points to 2120 in the lead up to the Brexit vote.

The Big Picture: Jun 14, 2016

This post was all about the FOMC’s rate decision the following day.

Tomorrow, I expect the Fed to punt. I expect the dollar to try and sell off, but be propped up by central banks when the yen carry trade unwinds a little more. And, I expect oil to rise to compensate.  If SPX sells off, and if you’re very careful not to get whipsawed, I’d look for opportunities to short SPX, possibly down to 2017 or even 2000.

The Fed did punt.  The dollar did sell off.  Oil did rally to compensate.  But, SPX’s sell-off was limited to 35 points in the lead up to the Brexit vote on the 23rd.  It was then that we got a 122-pt plunge in line with our updated forecast two days before the vote:

Our big red target…would put SPX at 2010-2020. An overshoot to test 2000 is also a good possibility.

It overshot our “overshoot target” just a bit, finally reversing at 1982.  The vicious, CL and USDJPY-driven rebound erased the losses in only four sessions, with the 4th (incredibly) being the same day the UK lost its AAA rating.

The Big Picture: Jul 5, 2016

SPX rebounded absurdly quickly following the Brexit sell-off.   As it neared the .886 retracement of its drop, I thought we’d get a decline that would help SPX establish an Inverted H&S Pattern.  But, I had my doubts whether it would play out.

…either the white .500 at 2050 or the white .618 at 2036 would make a nice right shoulder for an IH&S Pattern targeting 2235.  And, depending on when it occurs, either would leave the yellow channel top unbroken.  That’s the bullish scenario.

SPX fell only to 2074 before an astounding 10-day 7.3% rally in USDJPY turned it around.  It wasn’t much of an IH&S Pattern, but SPX went on to make new highs anyway — reaching 2193 so far this past week.

A New Analog: Aug 3, 2016

In this latest post, I focused in on the various tools which have been used to push stocks higher, and laid out a path for SPX for the next several months.

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