As we discussed yesterday, USDJPY has reached a critical line in the sand.  As one of the primary drivers of equity algos [see: Yen Carry Trade] this creates a potential headwind for stocks.

Over the years, oil and the USDJPY have mostly offset each other – with one bolstering stocks while the other resets (or, moving in tandem if the situation is dire enough.)  The most significant such event was in July 2014, when WTI’s crash began on the very same day that the USDJPY broke out to new highs.

This enabled Japan, which had recently seen inflation near 4% as a result of soaring oil prices, to withstand even further yen depreciation.  It also enabled SPX to remain above the critical resistance (1823) through which it had recently pushed.

As oil crashed, Japan’s inflation rate settled back down to the level at which the BoJ could justify continuing an insane amount of QQE (which continues to this day.)  And, SPX went merrily on its way to its next technical resistance at 2138, backtesting 1823 another 4-5 times (in case there were any unconvinced bears left standing.)Why the history lesson?  The huge white channel that has carried USDJPY higher since 2010 broke down on January 24, two sessions before SPX topped out and began a 340 point (11.8%) correction.

When SPX finally bottomed out at its 200-day moving average on Feb 9, it was because USDJPY was making noises about rejoining the broken white channel and because oil took the opportunity to bottom out and begin a 29% rally (yep, the same day.)

While CL did the heavy lifting, USDJPY reset for the next six weeks.  It bottomed on Mar 23, the very same day that SPX tagged its SMA200 for the second time.  USJDPY has since supported SPX’s slow, tortuous climb back above a key Fib at 2703 ever since.

But, yesterday, it reached a critical line of resistance — a backtest of the huge white channel from which it originally broke down and instigated the Jan-Feb correction.Normally, backtests mark reversals. So, when we talk about reaching “critical resistance” we’re not just talking about the currency pair.  If USDJPY doesn’t push through resistance, stocks will not be amused.

We’ll take a look at the various scenarios and the likely outcome of each.

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We’ve been beating the inflation drum for months, wondering when the folks behind the curtain would finally pull the levers to reign in energy prices.  Yesterday was a good start, as gasoline and WTI futures were both off sharply.

Ordinarily, we’d expect to see stocks suffer in tandem.  But, as we discussed yesterday morning:

So far, [VIX] has put the brakes on at a backtest of the recently broken straw-man trend line.  If it can remain below the red TL and the SMA200, and USDJPY keeps ramping, stocks will suffer a mild pullback.

That’s exactly what happened.  Another VIX pullback this morning……coupled with a breakout by USDJPY……has futures in the green by 15 points.But, of course, CPI isn’t out just yet.

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USDJPY reached our upside target this morning, tagging the top of the falling white channel from 2015.  This is the terminus of a move which began in late March [see: Algos to Markets – All Better.] This is a pivotal point for the pair, particularly since ES reached its IH&S target overnight.continued for members… (more…)

Futures are slipping higher this morning… …primarily on follow through from VIX’s dump below support.continued for members… (more…)

Stocks did all they could, yesterday, to project renewed strength.  But, despite gaining 23 points, SPX didn’t break out of the falling channel it’s been in for a month.  Neither it nor ES were able to clear the neckline of their IH&S Patterns.  And, though DJIA finally closed above its 200-day moving average, it was by 3 points, literally in the final 10 seconds of trading.

Toss in the fact that RB, CL, USDJPY and DXY are all sliding, and VIX remains above horizontal support, and you get the feeling stocks aren’t ready to commit to higher prices.

It’s the same sense I get when I read the Fed minutes.  Things are going so great that they need to raise interest rates twice more.  But, they can’t shake the feeling that a recession is just around the corner.  So, they’ll probably stop hiking soon — coincidentally, right about the time the yield curve (as a result of their hikes) would otherwise invert.

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If you liked Tuesday, you’ll probably like today.  We have an apparent overnight ramp in RB and CL (to the same overhead resistance)……a dip in VIX (to the same support)……and, another close by DJI below its SMA200.This time, S&P futures are up 17.5 points (previously 12) and still haven’t broken out of the falling channel from Jun 13 nor above the IH&S neckline.It’s not hard to imagine the instructions arriving from the Hamptons: “just don’t let it crash!”

And, speaking of crashes…I saw a few very interesting charts this morning.  The first depicted a pace of corporate buybacks that was shocking.  According to BAML, corporate buybacks are practically the only net purchasers so far this year.  Imagine that.

The other put the rise in gas prices into perspective.  Most Americans are spending incrementally more on gas than they received in cuts from the recent tax bill. Take the lowest 20% earners and multiple the 8% of their income spent on gas in 2016 by the 30% YoY increase we’ve seen.  The 2%+ increase in expenses easily outpaces the zero-point-whatever benefit they received from the tax bill.  No wonder Trump is getting a little nervous.

Or is he?  If you’re the leader of the free world and have a direct line to the leader of every friendly OPEC member, is a tweet really the most effective way to get your message across?  Or, is it just possible the tweets are window dressing, intended for his supporters?  Just a thought.

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The overnight ramp job might feel like the real thing……if not for USDJPY’s breakdown.  If the wizards really wanted to complete the IH&S Pattern and send ES soaring to 2800, there’s no way in the world USDJPY wouldn’t have held the TL it’s been working on since Jun 25. Note the negative divergence between the pair (higher highs) and ES (lower high.)

VIX made a valiant effort.  And never say never, of course.  After all, SPX did bounce off the critically important 2.24 extension again.  And, holidays are notorious for nonsensical leaps over tall buildings. But, for the time being, this looks like a headfake.  ES 2743 and SPX 2741.50 are the (neck)lines in the sand.

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SPX reached our upside target quickly enough, but the reversal held off until the last hour of the day.Part of the problem, of course, was the CL/RB ramp.  The other was USDJPY, which popped through the previous high as expected.It won’t be enough, though, as the SMA200s are finally close enough to let volatility go where it wants.  The only questions are when and whether the SMA200s will hold.  ES’ SMA200 is only gaining about 1-pt per day, so there’s little value in delaying it any further.

The nice thing about the all-clear is that oil and gas should finally be free to make their moves.  Without quarter-end equity numbers to protect, we should get some good action.

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Futures dipped a bit overnight as reports suggested Trump was considering withdrawing from the WTO.  For the second time this week, Mnuchin came to the rescue with a vehement denial.  And, for the third time this week, the algos got plenty of support from VIX shorting (breaking trend no less)……and USDJPY ramping. What a fitting end to a quarter where politicians, central bankers and corporate buybacks have set the tone, calming the markets at every turn.  Still, this isn’t exactly a bullish-looking pattern — especially when SPX fails to break out of the falling white channel.And, while everything appears copacetic, has anyone noticed that the Dow closed below its 200-day moving average for the past four sessions in a row?

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