To continue yesterday’s theme, we focus this morning on the Nikkei futures, which are testing a critical TL – again.  NKD is the first derivative of the BoJ’s manipulation of stocks via yen devaluation and, at times, leads “markets” in carry trade-oriented algorithms.

This support, therefore, is critical not only to NKD, but to SPX and the entire yen carry trade complex. [see: Update on NKD: Feb 9, 2016.]

continued for members…We’ll watch for an initial sell off to either backtest the broken red channel or the .886/1.618 combo at 1826.66-1827.78, followed by what should be an aggressive rally.If the rally fails to materialize and USDJPY and NKD are falling further, then things could get very ugly very quickly.As we discussed yesterday, ES and SPX are a little out of sync.  When SPX reaches its .886, ES will still have a few points to go.

UPDATE:  9:36 AM

Getting a bounce from USDJPY and NKD, trying to defend the TL?  Switching to cash at 1838.89 for now, as this bounce seems premature and will likely peter out.UPDATE:  9:40 AM

Back to short here at 1844.08 — the channel top back test.UPDATE: 9:43 AM

Trying to break out. Back to cash at 1844.29.  Next stop should be the SMA5 100 at 1849ish.UPDATE:  9:49 AM

USDJPY has reached overhead resistance.  Back to short at 1855.45 to let MAs catch up — ideally, a backtest of the broken red channel at 1841.26.  The white channel midline above at 1857 should provide overhead resistance.ES has reached TL resistance.NKD has reached the SMA5 100, but could leak higher still to the 200 at 16197 as it crosses the falling channel top in an hour or so.UPDATE:  10:00 AM

With the algos so strong this morning, this might be all we get.  I’d close the short here at the SMA5 10 and revert to long with tight stops.  As mentioned above, the better turn would be at 1841.  But, USDJPY is pushing higher above resistance and NKD still has that 16200 overhead target.UPDATE:  10:10 AM

NKD just reached the SMA5 200, and USDJPY reversing at the red TL  Back to short here, but if we get whipsawed again I’ll probably sit out for a while.  Things are moving just a little too fast…It’s possible now that the algos have kicked in that SPX will attempt to ride the SMA5 10 higher all day.  If so, this short might only get us to 1852 or so.

UPDATE:  10:17 AM

There’s the SMA5 10.  Back to long here with very tight stops.UPDATE:  10:20 AM

Back to short, as USDJPY is failing to bounce.UPDATE:  10:22 AM

USDJPY is bouncing after all.  I’m going back to cash, as things are just too hinky at the moment.  I don’t like the whipsawing going on.UPDATE:  10:28 AM

SPX testing the SMA20 again.  I’d short here for the SMA5 100 or 50 at 1845/1842.UPDATE:  10:41 AM

SPX just reached the SMA5 100 at 1845.18.  Has potential for lower targets…watching USDJPY.UPDATE:  10:48 AM

USDJPY getting a big bounce.  Reverting to cash at 1845.44 until it settles down. UPDATE:  10:50 AM

Looks like the USDJPY backtest is complete.  Back to short here for 1841ish. UPDATE:  10:56 AM

Reached the .786, wondering if it’ll try for a full backtest.  I’d take profits here, and revert to short if it dips lower. UPDATE:  10:59 AM

Reverting to short if NKD pushes through midline.UPDATE:  11:02 AM

NKD bouncing instead.  Cash is good for now, though I suspect it’ll continue dropping to the 1826 on an extended backtest.UPDATE:  11:14 AM

Back to short at 1853.31 as ES and CL just tested their channel tops again, USDJPY backtesting SMA5 200.  A thought: if we get to 1826ish, it’ll probably be thanks to CL.  They might cycle NKD a few times, but that channel midline should be defended — even if it’s at a lower level later in the session.  It’s a hunch more than anything else at this point, as USDJPY and NKD could both pop at any second. UPDATE:  11:22 AM

Coming up on euro close, and NKD popping.  Back to cash for now. UPDATE:  11:31 AM

I’ll take another crack at a short here at 1855.52 now that euro markets are closed and USDJPY has completed a nice backtest. Note that CL reversed where it should have in order to maintain some downward pressure.UPDATE:  12:22 PM

There’s the SMA5 100 tag.  CL and USDJPY suggest more to come, though NKD just tested support.  Hard to see SPX dipping another 20 points unless NKD at least breaks through that TL.  Watching it closely, will go to cash if NKD bounces. This is why it sucks to chart/trade when NKD algos are working.  Note how few contracts it took to push NKD below the red TL to 15,940.  And, it was lots of 1 and 2 contracts at a time that produced a bounce back to 16,000.Just to be clear, these are HFTs that are trying to separate you from your money — nothing else.  Are we to believe the dip below the TL or the push back above it?

CL continues to melt down, now heading for the white .886 at 28.39.UPDATE:  1:16 PM

ES is just about to its .886 as NKD is nearing the red TL again.  We could get a bounce here, but I suspect it’ll push lower due to CL’s continued meltdown and USDJPY weakness.  I’d hold short, but be prepared to cover on short notice. UPDATE:  1:22 PM

Looks like we’ll backtest the SMA5 10 again — probably around 1840.  I’d revert to cash here at 1835.9 and see if there’s another leg down after.UPDATE:  1:34 PM

Just discovered I inadvertently posted the last two updates to another post on the DX.  Fortunately, we’re not too far off from the last update prior to that.  I’m looking for SPX to reverse here at the TL and SMA5 100, so back to short at 1842.77. It would sure help if NKD dipped below 15,850!  Might be tough to get SPX back to yesterday’s lows otherwise.  CL continues to melt down, UPDATE:  1:48 PM

SPX could break out, here.  I’ll go back to cash until it shows its cards. UPDATE:  2:07 PM

Should reverse here at the backtest.  Back to short here at 1851.59.   Tight stops, as the SMA5 200 at 1856 is another possibility. UPDATE:  2:27 PM

It seems that SPX is likely to tag the SMA5 200 in the next hour or so – perhaps at the whtie channel midline or another backtest of the purple TL around 1855 at 3PM or so.  I’ll try a long position here with tight stops.  If NKD or USDJPY dips below their red TL again, I’d go back to short in a jiffy. UPDATE: 2:44 PM

I’ll close the long position here at 1857.72 and revert to cash.  NKD just tagged its SMA5 200.  Big question, now, is whether or not the SMA5 200 is backtested or reversed back through… UPDATE:  2:49 PM

NKD pushing back below the white channel top.  Shorting here at 1854.07 with tight stops in case it’s just backtesting the SMA5 10 again.UPDATE:  2:53 PM

That was premature.  USDJPY easing higher.  Back to cash at 1854.52.UPDATE: 2:52 PM

After all’s said and done, today looks like a Flag Pattern that could take SPX all the way back to the red neckline at 1872.70 tomorrow morning.  I’ll take a shot at a long position here at 1856.09.UPDATE:  3:09 PM

That’s about all I feel confident about.  USDJPY just ran into resistance, so it’s back to cash here at 1867.86. I can easily imagine NKD melting on up to 16259 or 16311, but I feel like I’m lunging from one position to the other today.  Not sure if it’s me or the “markets” but I’ve been all over the map and would rather quit while I’m ahead.  I’m going to take a little break, and will be back in 15-20 minutes.

UPDATE:  3:43 PM

NKD just dropped through its SMA5 200, so I’ll take a short position here at 1854.81. UPDATE:  3:47 PM

Surprise, NKD suddenly rebounded.  Back to cash at 1852.73. Looks like TPTB want to close SPX in the green today.  All it took was about 50 contracts of NKD, bidding it back up over the SMA5 200.

In terms of tomorrow, I think CL is the other critical factor to watch  It retraced a little over .886 of its rise from Jan 20, but seems to me to have more downside to the yellow .886 at 26.22 in the next day or two.

Since DX didn’t quite reach its downside potential, maybe they’ll dip together in the morning before rebounding.This would be in keeping with the red channel bottom.

More later.