If yesterday was your idea of fun, you’ll probably love today.  When USDJPY tested the red channel midline and SMA200 after the BoJ’s underwhelming NIRP action, we forecast the next move would be lower.  And, it has been.  Last night, it dropped back below the SMA100, too.

There are numerous fundamental reasons why this might be the case.  But, since the USDJPY usually trades where the BoJ wants it to, the real reason is because they want to backtest the critical Fib at 120.11 (dashed, yellow line.)  Any potential decline should be defended there.  And, any further advance should be launched by one last backtest.The key, for the bulls, is accomplishing the 1.57 decline without too much disruption to the equity markets. Yesterday, it meant an inexplicable rally after the initial sell-off in the opening hour.  Will they permit the rest of the decline today?

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Friday’s runaway meltup was seemingly driven entirely by USDJPY.  On the daily chart, the 47-pt gain seems clearly correlated to the USDJPY rebound (that we had forecast several weeks ago.)

In reality, the initial USDJPY spike was responsible for only the first 20-25 points.  After that, it was all CL, which moved in tandem with USDJPY as it tried to regain its overnight highs.

So, what might it mean now that CL and USDJPY both just ran into heavy overhead resistance?continued for members… (more…)

Ten days ago, we outlined the predicament the market masters were in as a result of the yen’s strength [see: The Only Charts That Matter.]  We maintained, then, that the BoJ needed to get USDJPY back above the bottom of the red channel bottom dating back to 2014 in order to save stocks.

Last night’s venture into NIRP for a very small portion of Japan’s debt burden managed to get USDJPY up off the channel bottom.  But, gauging from the futures’ lethargic reaction, investors are underwhelmed.Note that the last time Kuroda et al levitated USDJPY, ES rebounded by 161 points, 117 of it in the first 24 hours.  This time — an unimpressive 52 points.

Yes, USDJPY is back above the critical .618 Fib at 120.11.  But, note that it stopped at the red channel midline, right where we can expect it to reverse.  While TPTB are certain to pile into stocks today to endorse Kuroda’s brilliance, the reality is that we’ve seen this movie before.  And, we didn’t like the ending.

The reality it that the yen carry trade [what’s this?] is fueled by the prospect of a continually cheapening yen — not one that flip flops about 120.11 for years on end.

If yen carry trade investors aren’t convinced that the USDJPY is ultimately headed higher, they won’t pile back into stocks.  They’ll play the bounce, for sure.

But, a sustained rally isn’t in the cards unless Kuroda & Co. do something more dramatic than follow the ECB down the path of failed central planning policies.

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In the continuing farce saga that is the oil “market” rally, CL has now spiked 23% since Jan 20 — the equivalent of over 3,600 DJIA or 435 SPX points in a little more than a week — all on unconfirmed rumors of a 5% production cutback by OPEC members.

CL, which is pushing back above the falling white channel midline, should push back above the bottom of the falling purple channel by the time it’s all over.Needless to say, ES is off yesterday’s lows to the tune of 30 points or so and will at least test, if not push back into, the broken rising white channel.  You can’t make this stuff up, folks.Where does this leave SPX?

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If the Fed’s feeling a little sheepish about raising rates and touching off another equity meltdown last month, today’s statement should be oriented toward soothing the “markets.”

The futures, which were off almost 1% overnight, are currently showing a 5-pt drop. Even oil, which fell apart (after the close, of course) yesterday, has regained much of its losses and has managed to maintain its upward trajectory.So, what could go wrong?

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Trading has been rewarding but challenging over the past few months.  Take yesterday, for example.  SPX tagged our targets pretty much as laid out in the morning:

Look for SPX to backtest at least the SMA10 at 1899.34.  If that breaks, then the red channel midline at 1896 and the red neckline at 1880 are the next major levels of support.

SPX fell through 1899 pretty quickly after the open, then dipped to 1895 for the midline tag.  So far, so good.  A small rebound to flesh out the falling purple channel, and it would have nailed our 1880 target around 2pm.  The only hitch — need I even say it? — CL and USDJPY decided to break out above established channel lines at about 12:30.   SPX bounced 14 points, trashing the nice little falling purple channel. It worked out fine for us.  We got to participate in the bounce, and made more on our final short as it began at a higher price and dropped further.  Instead of making 20 points on the drop from 1900 to 1880, we were able to rack up 44 points (+2.3% vs SPX -1.52%.)

But, there were several head fakes along the way as multiple intraday declines suddenly reversed for no obvious reason other than a sudden spurt higher by USDJPY or CL.

I liken trading in this environment to driving an automobile by staring solely at the dashboard.  Stoplight up ahead?  Hairpin turn?  Remain focused on the speedometer, the tachometer and the temperature gauge.

The tools that were once interesting indicators of how the market was doing and where it might go are now being utilized to determine its trajectory.  It worked beautifully for the bulls while CL and USDJPY were on the rise.  Lately, not so much.

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After Friday’s algofest, futures are currently off about 8 points.  As usual, we’ll look to USDJPY and CL for clues as to today’s action.  Note that there’s a new CL update out this morning that touches on the big picture.continued for members… (more…)

In our last update on Jan 6, we noted that USDJPY had reached 34.17 our next downside target, commenting:

In an unrigged market, it would suggest a possible bounce… But, the noose of USDJPY is still hanging around CL’s neck, and could easily drag it lower.

USDJPY needed another leg lower to reach our downside target.  So, CL dropped through three additional levels of support, dipping through our 29.61 target before finally getting an unbelievable 18.8% two-day bounce — the equivalent of 3,000 points on the Dow.

Needless to say, if the Dow had gained 3,000 points in two days, even the MSM would wonder if something fishy was going on.   But, CL’s bounce has attracted no such incredulity.

Most observers continue to frame its moves in terms of fundamental supply and demand.  But, as we’ve noted countless times, CL has become just another tool by which stocks are manipulated higher via algorithmic trading.  But, there’s the rub.

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Ask this guy: Haruhiko Kuroda, head honcho at the Bank of Japan.  More than ever, he’s the guy who holds the key to the “market’s” future.

As we’ve explained many times, the yen carry trade has been the primary driver of stocks’ rise since 2011.  In fact, without an ever-rising USDJPY, there is no rally.

This has never been more obvious than in the 14 months since USDJPY reached a key Fibonacci level of resistance at 120.11 — the 61.8% retracement of the drop from 147 to 75.  It’s the dotted yellow line in the chart below.USDJPY reached this Fib line in December 2014, and has gone essentially nowhere.  In an unrigged world, it would have reversed down to the .500 Fib at 111.60 at a bare minimum.  But, Kuroda & Co. know full well that a drop that low would have serious repercussions for stocks.  How do they know?  They tried it.

Nervous about the way an ever-cheaper yen gnaws away at purchasing power, they let the yen appreciate (a USDJPY decline) to as low as 115.56 later that month.  SPX promptly plunged 107 points.  They tried again in January 2015, just to make sure.  This time, SPX fell 105 points.

They quickly ramped USDJPY back up to new highs — from 115 in January to 125 in June.  Sure enough, SPX dutifully followed along, rising to new highs until peaking on May 22 at 2134.  We called an impending top on May 20 not only because SPX had nearly reached our 2138 target [see: The Last Big Butterfly], but because USDJPY had run into serious overhead resistance.Not only had it run into the bottom of a very long term channel, but fundamental factors were coming into play.  Emerging markets were melting down.  And, all that hot money that the Bank of Japan had created out of thin air came flowing back into the yen — dramatically strengthening it.

USDJPY held on until mid-August, at which point it plunged from 125 to 116 in about a week.  SPX plummeted to 1867, a 267-point, 14.6% drop from its highs.

The BoJ wasted no time in getting USDJPY back to the key Fib level at 120.11, allowing SPX to recover over half of its losses.  By the time they forced it up to 123, SPX had recovered 90% of its losses.

The strengthening dollar — exacerbated by the Fed rate increase and a spate of bad news out of China — again put pressure on emerging market currencies.  Again, the yen strengthened, the USDJPY fell, drop-kicking SPX to new lows.  This time, it fell 304 points, a 14.3% drop from recent highs.

Notice that each time USDJPY dropped between December 2014 and August 2015, it landed at the bottom of a nearly flat red channel.  The yellow arrows indicate where it bounced.   This latest time, it dipped slightly below that channel bottom — allowing SPX to close below the neckline of a large Head & Shoulders Pattern that suggested another 15% decline.The BoJ got the message.  Because, in the past two days, USDJPY has soared by 2.5% — well above the red channel bottom and over 2/3 of the way back to the .618 Fib at 120.11.  SPX has bounced 96 points — about 5.2%.  The Nikkei soared 9.4%.  In two days.

Just to make sure the rebound didn’t stall, CL was ramped higher, too: a whopping 17.4%. It’s the equivalent of 2,800 points on the Dow.  You can’t make this stuff up.

Is Kuroda serious this time?  Will he maintain USDJPY at this level or higher?  We know he’s motivated.  Between the BoJ and the GPIF (the Japanese government employee pension fund) they own stocks worth about 15% of Japan’s GDP [see: Japan’s Equity Trap.]

And, they just had a pretty good scare.  As of Wednesday, the Nikkei had fallen 25% since August 10 — a hit of almost 4% of GDP.  It’s a pretty big number.  But, wait, why has the BoJ’s equity portfolio increased?

Between August 10 and January 20, the BoJ’s ETF portfolio grew from 5.7 to 7.0 trillion yen — a 23% increase.  Factor in the market losses, and the equity bet has actually grown by an astounding 57%!   I ask, again…is Kuroda serious this time?

Imagine you’re standing at a craps table in Vegas.  Before you flew in, you “borrowed” a rather large sum of money from your company’s pension plan.  It’s 2 1/2 times what you make in a year, so there’s no chance of paying it back unless you win tonight.  So far, you’re down 25%.  Your wife is in tears, threatens to leave you.  Laughing, you whip out your Amex and add another 57% to your bet, increasing it to more than it was in the first place.

That’s Kuroda.  At 250% of GDP, Japan’s debt dwarfs that of the US, Germany, Italy — even Greece.  By increasing his equity bet, funded by taxes and debt, he’s going all in.  Losing is not an option.  And, while he might lose his job if he fails (is Harakiri still a thing?), the Japanese people will be the ones in tears.

I see that picture up top, of Kuroda laughing his ass off, a lot.  It’s obviously a moment of unbridled emotion.  Someone might have told him a hilarious joke.  Then, again, it might just be the delirious laugh of someone who bet the house on one last roll of the dice.

Stay tuned.

In an attempt to convince the world that the economy was, indeed, robust, the FOMC recently raised rates.  It was also a bid by the Fed to retain what little credibility it has left.  It failed.

As I have been writing for the past couple of years, the yen carry trade [what’s this?] has been the primary lever of higher stock prices since 2011.  As long as the yen continues to get cheaper and the dollar richer, the USDJPY climbs higher — taking stocks along with it.

But, the Fed’s actions exacerbated a currency crisis going on in secondary markets.  Hot money from the slush fund known as Japanese financial markets flowed back into Japan.  The yen strengthened.  Two days ago, the USDJPY plunged below the bottom of a channel dating back to October 2014 — seen above in red.  As we pointed out at the time, every dip to the bottom of this red channel has caused a sell-off in stocks.  And, each successive dip has produced larger and larger sell-offs.  This latest one, which dipped below the channel bottom, produced the worst.

At the same time, SPX and ES dipped below necklines of large Head and Shoulders patterns that targeted additional 15% declines.  As I wrote yesterday:

If, on the other hand, it closes back above 1887 or so, then bulls can breathe a little easier.  The RSI charts indicate it’s not too late.  But, again, it can’t happen without CL and/or USDJPY moving dramatically higher.  Today was a start.  Will they keep it going?  It must start right here, right now.

Last night, “sources” leaked that the BoJ would increased QQE — code for a higher USDJPY, which enables the yen carry trade to soldier on.  Kuroda begrudgingly confirmed the reports this morning.  USDJPY is up over 2% since Wednesday’s lows. And, Saudi Arabian Oil CEO Khalid Al-Falih confirmed that oil had overshot to the downside, and was due to rebound.  CL is back in its falling red channel, having spurted 15% higher in the last two days.  This is equivalent to a 285-pt rally in the S&P 500 or a 2,400-pt rally in the Dow.

Is it any wonder the futures are up over 30 points at this time?  Central bankers won’t be able to toot their “the economy is good enough that it doesn’t need supporting anymore” horns.  Oh, well.  Credibility is overrated, anyway.

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