On Friday, SPX successfully spiked back above the neckline of a bearish H&S Pattern, then spent the rest of the day backtesting it. With USDJPY and CL both on the rise this morning, look for SPX to try once again to break out of the topping pattern it’s been in for the past week.

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In our Mar 4 Update on Gold, we identified 1286 as an important turning point.  It was one of two upside targets we had assigned on Feb 10, when gold closed at 1197.

GC topped out six days later at 1287.80, presenting a nice shorting opportunity.  By the end of March, it had tumbled a respectable 6.3%.

Since then, however, it has climbed steadily higher.  It begs the question: is this just a bounce in the midst of the drop, or are higher prices in store?

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This is currently one of those situations that’s too close to call.  GC has retraced .886 of an .886 of a .500 of an .886.  It is a hair’s breath from breaking out, even though it’s in the midst of a downturn.

I’ll explain.  The white grid above is nestled within the red grid below which is nestled in the larger purple grid below.  And, it’s the purple grid that matters most.

The drop from 1287 fell from the white .886 to the white .618.  We draw the purple grid there, and note that the bounce to 1246 on Mar 30 represented a .500 retracement.  Some corrective waves, that’s all you get.

But, the subsequent drop (to a higher low) sets up a potential Bat Pattern to the purple .886 at 1278.50 — also a reasonable bounce for a corrective wave.

GC frequently trades in the same direction of stocks — the “all one market” theory.  But, lately, it’s maintained an inverse relationship — a result of growing fear.   So, it’s not surprising that it’s in the same situation as SPX — on the brink of a breakout or breakdown.If it breaks above 1246, then the purple .618 at 1257 is a gimme.  From there, we have potential resistance at 1270, which is also about where the purple midline currently resides.If it breaks above the purple midline, then 1379-1380 is the next logical target, perhaps in Sep/Oct.  So far, it’s been doing a nice job of rising the rising moving averages, with the SMA50 around 1220 coming into play the last few days.Note that the SMA50 would also represent a backtest of the red channel it recently broke out of.  If that doesn’t hold, then the white channel bottom around 1207 makes sense.

GLTA.

Is it any surprise that CL and USDJPY have rallied sharply in response to yesterday’s mini-meltdown in stocks?  After ES and SPX both completed H&S Patterns that might have sent them down to backtest (horrors!) their SMA200s, CL is up 7.3% and USDJPY 1.3% off yesterday’s lows.

News or fundamentals?  Nope.  Just talk…aimed at averting a negative outcome for equities.  The BoJ is talking more QQE or even more negative rates since they’ve both been so successful (not!) in turning around the Japanese economy. And, oil?  What can I say?  If there’s a limit to this manipulation insanity, we haven’t found it yet.

Needless to say, equity futures are loving it.

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Depending on your affinity for conspiracy theories, the BoJ has either failed to keep a lid on the value of the yen, or has allowed it to appreciate to the point where it now compensates for the 60% increase in the cost of oil since Feb 11.  Regular readers know where I stand.

Regardless, USDJPY’s flat red channel from Nov 2014 broke down long ago.  The falling white channel from December 2014 has broken down. And, the rising purple channel from 2011 is now officially dead.

It hasn’t mattered all that much to the “market” yet, as CL has taken over as the most important driver of day to day equity ramps.But, at some point, the other 3-4 trillion in equity investments that rode the yen carry trade up from 2011, money that might not be tied in to the CL carry trade — or, might have some well-placed reservations about its long-term viability — are going to wonder if USDJPY is well and truly dead.

Not to worry.  I believe the BoJ has a plan.  And, since all their other plans are working out so well, what could go wrong?

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Yesterday marked an epic battle between algos driven by CL and those driven by USDJPY.  CL won.  As USDJPY melted down to lows not seen since Halloween 2014, SPX refused to budge — not until CL announced it wouldn’t bounce any higher.

We won’t mourn the impending death of the yen carry trade, as we’ve seen too many resurrections over the past year to assume it’s truly toast.  Besides, this latest turn of events gives it the freedom it needs to reach the next lower target on our list.

But, we’ll focus more on CL, and how reversals like yesterday’s can impact intraday swings.  Hint: there will be more, and they will be even wilder.

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So much attention has been focused on CL, lately, that USDJPY’s oscillations have gone largely unnoticed, until last night.  It reached levels last night not seen since Oct 31, 2014 — the day that Kuroda surprised the markets with a massive expansion of QQE (days after promising it wouldn’t happen.)

USDJPY spiked 3.26 higher that day, and 12.64 over the next 5 weeks.  Thanks to the wonders of the yen carry trade [what’s this?], SPX rallied to new highs, tacking on 220 points from its October lows.In other words, from 110 to 125 and back again.  SPX had reached the same level as of February when CL’s 63% spike fed a different set of algos.  But, CL topped out a couple of weeks ago.

[see: How to Engineer a Rally.]

Is it time for some new leadership?  Or, at least, some new old leadership?

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The trickiest part of harmonic chart is the area between the .786/.886 Fib retracements and a former high.  Even in unrigged markets, this area could mark anything from a prelude to new highs to a slight overshoot of a corrective wave.

SPX has reached this, our upside target, with little trouble, largely on the back on CL’s 63% spike since Feb 11.  Now that we’re here, it makes sense to be a little more cautious.  The manipulation that has been the hallmark of the past six weeks is about to get much worse.

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Originally posted privately for a retainer client:  Apr 3, 2016

Silver looks pretty dicey as a short to me.  Here’s my take.  There are two possible major channels that are quite bearish using log scale……and a nice, supportive TL using arithmetic scale.Either way you look at it, SI has tested and reversed off its white .786 at 13.817.  It hasn’t broken out of the falling purple channel yet……but, it’s working on a rising white channel that’s aiming at a breakout… …and, has tested and bounced off its SMA200 at the bottom of that channel.  Even if the white channel and SMA200 broke down, you’ve got support at 14.623 – only 2 1/2% below current levels.  Not worth the aggravation.

This is not a great setup for a short, and I wouldn’t advise pursuing one at this time.

Bottom line, there are much more interesting setups to pursue, such as if/when USDJPY or CL reverses higher the next time in order to save the day.

 

 

When we last examined USDJPY, it was spurting up above the bottom of the broken purple channel which had guided its rise from 75 in 2011.  It looked like USDJPY was going to reassert itself as the principle driver of stock prices.  But, it topped out 4 sessions later at a lower high that reinforced a falling channel that’s almost two months old.

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The first in a two-part series…

I write almost every day about how CL and USDJPY-driven algorithms are being used to drive stocks higher.  It used to be almost solely USDJPY, via the yen carry trade.  But, as the yen got too cheap and started producing real live inflation in Japan, central banks needed to keep the “we must have more inflation/easing!” meme alive.

They simultaneously crashed oil, which took inflation down a notch or two and largely offset the impact of the sinking yen (rising USDJPY.)This was great for stocks.  SPX, already up 85% on USDJPY’s levitation from 75 to 105, rallied another 7% through some very difficult overhead resistance.  But, clearly the effect was waning.  When USDJPY topped out, stocks did too.The other problem was that crashing oil had nasty side effects.  It bankrupted oil companies, threatened banks, and hit oil producing states and countries hard.  With O&G making up 15% of the SPX, lower oil prices were hurting more than they were helping.

When CL plunged through a long-term channel dating back to 1998 earlier this year, stocks plunged too, dipping below the Aug 2015 and even Oct 2014 lows.  It was time to engineer a rebound. On Feb 11, we called a bottom on CL and USDJPY based on very clear chart patterns [see: USDJPY Finally Relents.]  Over the next five weeks, oil futures spiked an astounding 63%.  SPX (which also bottomed on Feb 11) spiked 13.4% and, two days ago, nailed our upside target identified on Feb 22.  It capped off the single biggest quarterly rebound ever for the Dow.

CL’s rebound wasn’t straightforward.  It initially launched into the sharply rising purple channel seen below, also constructing a rising wedge (in yellow.)  This took CL as far as heavy resistance at 39, where multiple channel lines and Fib levels spanked it back down.  When the rising wedge also broke down, SPX reversed below the recently reacquired 2000 level in a heartbeat.

But, with the rally in danger of falling apart, CL suddenly gapped dramatically higher, breaking out of the rising purple channel and past all that overhead resistance to new highs.  It’s highlighted in the above chart in blue.

By the time CL reached its peak on Mar 18, SPX had spurted up another 50 points to 2050.  At that point, the party might have been over — especially after CL fell back below the purple channel top.   But, USDJPY had other plans.

Unlike CL and SPX, USDJPY spiked only 3.5% after bottoming out on Feb 11.   It made sense, as Japan imports all its oil.  With CL up 63%, the BoJ needed the yen to maintain at least some buying power.

On Mar 18, with CL topping out and stocks thinking about joining in, USDJPY began a third spike higher — this one 2.8%.  The BoJ didn’t really want USDJPY to make new highs (purchasing power, remember?)  But, it was enough to drive stocks up to new highs.  It was essentially a downsized repeat of the July 2014 big event.But, it didn’t have legs.  By then, it was apparent that USDJPY was going to bounce back and forth within the falling red channel shown above.  When USDJPY reversed before even reaching the top of the red channel, it required some fancy footwork for CL.

Tumbling fast in a falling channel that began on Mar 18, CL suddenly spiked higher — seemingly breaking out of the channel and suggesting an alternative to the large, purple channel it had broken out of a few days before.  The new, rising red channel was even more impressive than the purple one.  Surely, CL was headed for new highs.

As we anticipated, the breakout was a phony as a $20 Rolex.  But, it didn’t fall back to earth until after SPX had been driven up past critical resistance [see: Why Today Was Critical.]  Of course, having fallen for it once, investors wouldn’t be stupid enough to fall for it a second time, right?

Actually, they fell for it a second and a third time: yesterday and, most recently, early this morning.  Yellen’s dovish diatribe earlier this week linked the need to go slower in raising rates with weak economic performance both here and abroad.  This morning’s positive economic data, coupled with bearish news for oil out of Saudi Arabia, sent oil (and thus equity futures) tumbling.

USDJPY made a valiant effort to limit the damage to ES’ SMA10 around 8:30, but the selling pressure was too strong.  It took CL bouncing off key technical support and another, stronger push higher by USDJPY to turn the ship around.

By 1:00 this afternoon, the morning’s losses had been completely erased and SPX was making new highs again.  USDJPY made a half-fast effort to engineer a backtest along the way, but to no avail.  Once the momentum ignition has occurred, it’s tough to switch it off.

USDJPY and CL are, at this very moment, plumbing new lows, even as SPX melts up.  Why?   TPTB don’t really want more expensive oil and a less valuable yen.  They simply want the higher stock prices that go along with them.  They want all the taste without the calories.

Actually, it’s more like all that Coors Lite you drank in college.  Sure, it tasted like camel piss.  But, damned if it didn’t make you funnier, better looking and a great dancer all at the same time!

Unfortunately, these currency and commodity manipulations also come with a hangover.  Higher oil prices are a wickedly regressive tax, impacting the poor and middle class the most.  And, as discussed above, a weaker yen imposes higher fuel (and food) costs on heavily burdened Japanese consumers (the ECB’s actions deserve a column all their own.)

We can only hope the damage stops there, rather than reaching the cirrhosis of the liver stage where extreme valuations produce even more extreme corrections and crashes.

If you’ve made it this far, you understand more about the “markets” than 99% of all investors — including many professionals with billions at their disposal.  It’s no surprise that many who were well-schooled in the Capital Asset Pricing Model and fundamental analysis can make no sense whatsoever of the last seven years.

None of the many models, equations nor principles I learned in earning undergraduate degrees in math and economics, an MBA in finance, or my CFA designation can explain the kind of close we had today — nor why its ilk has become commonplace.

“Buy the dip” has gone from a humorous catch phrase to a (supposedly) legitimate investment strategy — the fundamental, underlying philosophy of which is to forget everything you learned before 2009.

In the next installment of this two-part series, we’ll discuss how to successfully invest in such a heavily manipulated environment.

Stay tuned.

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