SPX nailed our next downside target yesterday, but the fun isn’t over. The eminis still have something to prove — its own H&S neckline — meaning SPX has a little further to go. From last Friday’s To H&S or Not to H&S:It will require some fancy footwork by CL, which popped up past its .618 Fib yesterday as though oil-related news had been positive. But, note the slide back below the white TL, and the lack, thus far, of a proper backtest. Remember, we have an EIA report out at 10:30 EDT.
Lots of charts updated yesterday: CL, COMP, AUDUSD and DJIA. I hope to finish several more today.
SPX melted up all day, yesterday, to the tune of CL and a late surge by USDJPY — tag teaming stocks higher. We finally had a reversal where expected, and SPX dropped to backtest the H&S neckline its been working so hard to avoid playing out.
It appears, from the futures’ action, we’ll get a shot at the IH&S discussed near the end of yesterday’s session.
USDJPY has been all over the map lately, but still owes us a reaction to the latest .618. continued for members… (more…)
AUDUSD has been quite coy lately, bouncing strongly in between two major Fib levels, then breaking down before it could reach a good bounce point. It’s mostly reacting to the schizophrenic US dollar, [see: May 6 Update on DX] which has been all over the map in an effort to prop up stocks.
AUD reached our .6897 target last September, but couldn’t seal the deal on .6584 before plunging stock prices sent it soaring. From 2011 through 2015, a rising dollar (i.e. rising USDJPY) sent stocks higher. Since the start of the year, however, CL has taken over the job of driving up stocks. And, when CL rises, the USD generally falls, which drives AUDUSD higher.
That’s why AUDUSD’s breakdown over the past two weeks is so interesting and, potentially, so important.
In our last update on COMP, I noted that the rising wedge we first charted in October had held off a second attempt to best the Jul 20 highs. The upside case looked better as a result of both higher highs and higher lows. But, it wasn’t a slam dunk. From Dec 4:
If [COMP] can’t make the leap, then there’s plenty of downside ahead: the red .618 at 4872, the white channel midline at 4500, etc. But, that’s not the way it’s shaping up.
As it happened, COMP had already peaked two days prior, and couldn’t make the leap. The wedge played out beautifully, and those downside targets were taken out in quick succession. By the time the dust settled at 4209, COMP had shed almost 19% from its December highs.
Though we post updated CL charts every day, it’s been a while since we took a step back to examine the big picture.
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Metaphorically speaking, CL suffered heart palpitations on Aug 24 2015, went into full-scale cardiac arrest on Dec 7, and was resuscitated this past Feb 11.
Aug 24 marked its bounce on the bottom of a very long-term price channel. Dec 7 was the day it plunged through the channel bottom. And, Feb 11 marked the bottom — the level at which we remarked, that day, that it must bounce.
As the .886 retracement of the rise from 10.65 to 147.27 between 1998 and 2008, 26.22 was the lowest price target listed in our Jan 6 Update on Oil. As we noted that day, below 26.22, and “things could get really nasty.”
Our outlook on CL was heavily influenced by what I saw as a growing reliance on oil futures to drive stock algorithms.
CL, in itself, has become a pretty effective algo tool. That is, when USDJPY isn’t available for ramping duty, a strong spike in CL almost always works.
And, if USDJPY doesn’t start moving higher soon, we’re going to see a lot more days like today, with sub-2000 SPX [see: Yen Carry Trade.]
SPX fell 200 (about 10%) points over the next two weeks as USDJPY continued to plunge through support. An interim bounce at 27.56 helped SPX bounce 135 points. But, the subsequent drop to 26.05 on Feb 11 unwound all those gains.
Since Feb 11, CL has rebounded an astounding 80% — the biggest quarterly gain since the stock market crash was declared over in 2009. SPX has rebounded 16.6% higher after bottoming the same day.
And, CL continues to drive stocks higher — as illustrated in recent posts such as How to Engineer a Rally. Is it sustainable? Doubtful. As CL becomes more expensive, consumers slide that much further under the bus — especially the Japanese, whose currency recently resumed weakening again, a double whammy because oil is priced in US dollars.
Then, there’s the central banker We-Need-More-Inflation! meme. For those of you who occasionally eat or drive, ever wonder why central banks exclude food and energy costs from their core CPI calculations? Ostensibly, it’s because these costs are just too darned volatile.
The reality? It’s hard to argue a pressing need for more monetary stimulus when actual inflation, if measured as it was in 1980, is closer to 9%. It also helps suppress cost of living adjustments for pensioners and their ilk. For a nice treatise on the changes and the rationale, see John Williams’ excellent Shadow Government Statistics.
When stock prices are at all-time highs, driven there by artificially low interest rates, direct central bank purchases and CL manipulation, is there any chance that oil prices will ever decline again? Actually, yes. But, it will mean finding a new (or, rather, old) catalyst for the algos.
The yen carry trade is still an option. But, the BoJ has made it clear they don’t really want an even cheaper yen (higher USDJPY.) They simply want the higher stock prices that come from it. If CL were to dump, USDJPY would have to rally to support stocks. They’ve certainly been talking, lately, as if that’s in the cards.
With that said, our forecast includes two scenarios.
One of my favorite Bushisms hails from 2005, when W. was extolling the merits of having Wall Street individuals manage their own social security funds.
“See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kinda catapult the propaganda.”
In many ways, the Dow chart is Wall Street’s version of repeating things over and over again until “the truth” sets in, an attempt to catapult the propaganda that everything is awesome.
The huge megaphone pattern that set up beginning in 1998 should have led to a reversal in late 2013 as it did in 2007.
Charted, instead, as a long-term channel, the same outcome was indicated. DJIA should have reversed at the channel top.
Ditto for the Fibonacci contingent: a well-defined Butterfly Pattern indicated a reversal at the 1.272 extension of 16,300 just like it did for the channel and megaphone patterns.Yet, it somehow defied all those time-tested patterns, pushed above all that resistance and went on to register new highs — even after the rising wedge (in purple) broke down.
It wasn’t a total surprise, given that the Dow’s meager 30 issues makes it an easy mark for spoofing and other price manipulation techniques. It commonly overshoots upside targets and undershoots downside targets.
But, the real story was the yen carry trade — the single most powerful influence on stock prices between 2011 and 2015. For those who are unfamiliar, here’s the general premise:
I know of no better proof of its influence than the DJIA. The yen carry trade was instrumental in each of DJIA’s efforts to break above the top of the red channel and megaphone top. Skeptics, be prepared to see things in a whole new light.
In the DJIA chart below, we see a close-up of the red channel top. Each of the significant spikes up through what should have been heavy resistance, and drops back below, are numbered for reference purposes.The chart below shows the corresponding period in the USDJPY. Remember, a higher USDJPY means a lower yen, which — thanks to the yen carry trade — drives stocks higher.
1. DJIA’s first pop up through the channel top came as USDJPY simply backtested and bounced off its 200-day moving average, then popped above its 100-day MA.
2. USDJPY popped above the .382 Fib which had precipitated its consolidating triangle. This was the 5th attempt to clear the resistance since USDJPY bottomed in Oct 2011.
3. Following the 10/31 surprise expansion of QQE, USDJPY rose above 120.11, the critical .618 retracement of its drop from 147 in 1998 to 75 in 2011. This also represented two different channel tops for USDJPY.
4. After reversing below 120.11, putting in two subsequent lower lows, USDJPY suddenly spiked back above it and made a new high.
5. DJIA made a new all-time high with this return above 120.11 by USDJPY. Note that USDJPY had just closed below its SMA100 for the first time in 7 months, a bearish development.
6. USDJPY’s failure to make a new high and subsequent plunge below 120.11 was responsible for DJIA dropping through the red channel top, shedding over 16%.
7. Almost immediately, USDJPY pushed back up through 120.11. It criss-crossed the critical Fib level an incredible 30 out of the next 36 sessions. It typically rallied higher during market hours (when stocks were subject to its influence) and reset after markets closed (in order to rally again the following day.) It finally pushed through strongly on the day that DJIA needed to gap above its own critical .618 Fib.
8. The second drop through 120.11 was almost as traumatic for DJIA. It shed only 14% this time. Not so coincidentally, it bottomed slightly higher than in August, which was slightly higher than in Feb 2014. When it fell back a couple of weeks later, it was another higher low.
This post didn’t start out as a study on the effects of the yen carry trade. And, it won’t end on that note either. In fact, the USDJPY has become a bit player in the effort to catapult the propaganda. The chart below shows that USDJPY was no help at all in the rally which began on Feb 11.Regular readers will recognize Feb 11 as the day oil bottomed — right on cue, in fact [see: USDJPY Finally Relents.] A subsequent 80% rally in the past three months — the sharpest since 2009, after stocks had finally bottomed out — has produced a 17.6% rally in DJIA.
Not so coincidentally, it has propelled DJIA back above the red channel line. CL is playing the game exactly as USDJPY did, with spikes above obvious resistance — such as the long-term channel bottom it broke below in January — signaling the algos it’s time for DJIA to also spike higher.With DJIA having dropped back to the red channel line on Friday, is it any wonder CL has spiked over 3% to new highs this morning? Don’t bother looking for news in the oil complex. The “news” is that DJIA has reached another critical point where, much like #8 in the chart up above, one false move could mean another plunge.
CL’s latest spike is good news if you have a large stock portfolio and don’t mind spending more at the pump than you used to. If you’re barely getting by and can’t afford to trade up to a Prius, not so much.
Stay tuned.
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I’m going to do something a little different today. Instead of following SPX all day, I’m going to post updated charts on all of the various indices I follow. [Though, for anyone who’s curious, SPX faces important overhead resistance at 2059ish.] Some of you who follow other currency pairs, small caps, etc. having been waiting patiently. Thanks for bearing with me.
Happy Friday the 13th, everyone. We take a look today at the yellow H&S Pattern [what’s this?], seen here on the eminis. There are multiple patterns within the pattern – including the red one which has already played out. But, the big yellow one has been very coy. It completed on May 4, even spent two sessions below the neckline before popping back above it. Yesterday, it dropped back below for the the 7th time.
We care about these patterns because they are great forecasters of future moves — this one targeting 1981. But, what does it mean when they suffer from a failure to follow through?
The obvious answer is that TPTB are working very hard in the background to prevent a big drop. Just look at USDJPY this morning, and you’ll see what I mean. Honestly, is there any reason why a slightly higher than expected, but still anemic, retail sales figure (which is probably rubbish in the first place) should send the USDJPY spiking like that?Of course not. But, the yen carry trade is still fresh enough in everyone’s minds (more importantly, the algos’) that it turned ES’ 7-pt loss into a 1-pt gain. Happens nearly every day.
When SPX drops 1% in spite of a 3.5% spike in crude oil, TPTB get nervous. After all, the CL algo has been the best thing to come along since the USDJPY started sputtering last year [see: How to Engineer a Rally.]That’s why, this morning, we’re seeing not only another 1.6% CL ramp, but a 1% USDJPY ramp as well. Two ramps for the price of one!
SPX has. ES hasn’t. If TPTB play their cards right, this morning’s dip will be limited to 5-8 points that puts a well-defined bearish falling channel in the rear view. If they don’t, then the sharp rally over the past three sessions was all for naught.
For clues, we’ll start with CL. It went from completing a bearish H&S Pattern on a slew of bad news to a 4.5% rally in the past 18 hours — enough to pop SPX out of that falling channel. As usual, the rally didn’t end until minutes after SPX had closed for the day.continued for members... (more…)
USDJPY has popped 2.7% since Friday’s lows on the back of BoJ pronouncements that “of course, [they] could intervene in the currency markets.”
This, of course, is code for “of course, we can manipulate equity markets.” And, so, despite continuing weakness in CL, we see S&P 500 futures popping overnight. Can it last? Of course not. With oil at $44, a weakening yen imposes a heavy burden on Japanese businesses and consumers alike.
But, bottom line, their equity book is obviously much more important than their economy. That means we’ll continue to see plenty of intervention, especially if all it takes is talk — and, especially when SPX has completed bearish patterns such as last week’s H&S.
It will require some fancy footwork by CL, which popped up past its .618 Fib yesterday as though oil-related news had been positive. But, note the slide back below the white TL, and the lack, thus far, of a proper backtest. Remember, we have an EIA report out at 10:30 EDT.
