At The Brink

I didn’t set out to be an FX analyst. About the only time I ever focused on currencies was when planning a trip abroad, which seemed to always line up with USD lows. Eight dollars for a croissant? Really?

Ten years ago, however, I began to notice how closely aligned equity performance was with moves in the USDJPY and EURUSD. That curiosity blossomed into a robust appreciation of the fact that many currency moves have become tools for central bankers to support equity markets.

On April 23 [see: A New Catalyst] despite the fact that USDJPY had been locked in a falling channel since November 2016 and was seemingly breaking down, I added the breakout target shown below due to what I reasoned was stocks’ vulnerability at the time.

This morning, USDJPY reached that very target for precisely that same reason.

Likewise, EURUSD was seemingly breaking out of a downtrend. I expected the breakout to ultimately fail and for EURUSD to very gradually backtest the channel from which it had broken out. This would be the least disruptive outcome for stocks.A few days ago, EURUSD completed that backtest – after several more headfakes along the way of course.My point isn’t that I’m any smarter than other FX analysts. It’s simply that we can usually count on central bankers to manipulate whatever is handy (interest rates, currency exchange rates, vol, etc.) to prop up stocks.

This morning’s move was fairly predictable only because it was apparent that the BoJ (the reigning world’s best market manipulators) wouldn’t be satisfied with NKD’s backtest and reversal at its 200-day moving average. Thanks to USDJPY’s strong overnight move, the Nikkei had no trouble spiking through that particular overhead “resistance.”

At no time does the manipulation get more frenzied than around options expiration day. Today is one of those days and, as usual, stocks have gone hog wild in an effort to cause as many of the puts purchased over the past month as possible to expire worthless.

The falling channel which has faithfully guided stocks lower since our correction call in early September has seemingly been busted. Of course, that was also the case on September 16 after ES had popped through the yellow trend line and was apparently breaking out of the falling white channel going into the close.

The ruse continued into options expiration on Sep 17, at which point the bottom fell out and stocks suffered their worst two day plunge in months.

Why does it matter, you ask? Because we’re in a very similar situation all over again. Based on the market action yesterday and today, you’d be crazy to short stocks. Which is exactly what the market makers want you to think.