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Will there ever come a day when Draghi isn’t massively front-run?

Two days ago, we risked ridicule and asked Is the Dollar Really Breaking Out?  With the ECB about to increase its QE and the FOMC about to raise rates, a higher dollar was a foregone conclusion and, in fact, the most crowded trade out there.  Based on this morning’s actions, the answer is “maybe not.”

DX had pushed what appeared to be strong overhead resistance.  Similarly, EURUSD was forcing its was beyond strong support.  Our Nov 23 bottom call [see: Update on EURUSD] was stinking up the joint (with EURUSD almost 3% higher since that call, it’s smelling just fine, thank you.)

While EURUSD and DX matter, the key drivers of the “market” are USDJPY and CL.  And, it’s their reaction which will make the most difference in today’s action.

For a while, EURUSD’s continuing slump disguised the fact that USDJPY wasn’t going anywhere. DX was happy to push higher, no matter which pair was driving it — which made the yen carry trade seem healthy.  But, with the euro now strengthening and DX slumping, the yen might actually have to do something in order to support stocks.

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This chart doesn’t need much commentary.  It’ll either bounce or not!

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In a now all-too-familiar setup, CL has cratered, USDJPY has spiked, and the futures are playing things very close to the vest.  This would be a confusing technical picture if we hadn’t seen it a dozen times in the past few weeks.

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November was a breeze compared to October’s frantic moon shot.  Our results came in at 10.82%, a slight improvement over last month and a generous margin over the S&P 500’s 0.05%.

The biggest challenge was the number of gaps — both up and down — at the opening bell.  Seven of the eight sessions during the decline (Nov 3-13) involved gaps down of 10+ points.  To make matters worse, almost all of them came after a bullish close the previous day.

Needless to say, this made for a few nervous nights.  Bears are typically punished severely for such foolhardy stunts as holding short overnight.

All turned out well, though, as we both called the top and came up with a fairly accurate target 72 points lower (not to mention the strong bounce afterwards.)  The daily chart from Beware the Bat, posted on Nov 3:

The daily chart from yesterday’s close shows our forecast was pretty darned close.

I anticipate that December will be full of more twists and turns, given the highly-anticipated FOMC rate decision.  The ECB and BoJ are also expected to stir things up.

I will continue to look for opportunities for larger, longer-term swing trades.  But, I suspect scalping will generate better returns with less risk in the coming month.

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Thanks to all our new members.  I appreciate your business, and will do my best to continue generating reliable forecasts.  For those who aren’t yet members, please be aware that we are currently running our best promotion of the year.

New annual members can save almost 60% off the price of a regular annual subscription, and almost 70% off a year’s worth of monthly payments.  It works out to about $2/day.  Just enter the coupon code “Black Friday” where indicated.  Better yet, for only $200 more, you can lock in your rate for as long as you’re a member.

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The Fine Print:

1. Represents performance of a theoretical portfolio, where SPX is bought or shorted based on signals generated by my research.  Your mileage will vary.
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5. Past results are not necessarily indicative of future results.  See Disclosures and Use Agreement for important information.

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Ever since DX completed its Bat Pattern on Nov 18, it has been established a series of higher highs and higher lows.  Given that the lows were rising faster than the highs, it formed a rising wedge, seen in red below.  It was significant, because it not only enabled DX to finally close above its .886 (ever since the 27th,) it kept stocks on the rise even as USDJPY faltered.

So, it was with great interest that we watched DX’s rising wedge break down last night.  It was confirmed by both the yen and euro, in that it was accompanied by a rapid plunge in USDJPY and spike in EURUSD.

But, look closely at where its decline stopped, and you’ll see that DX has, so far at least, merely backtested the broken .886.  Will the Fib level hold, or is there more downside to come?  And, what does this tell us about the Fed’s widely-anticipated rate rise?

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The big picture shows several very significant features.  First, the drop from 1998 followed a fairly well-formed channel that was interrupted in October 2011 by a massive QQE expansion.  The subsequent yen devaluation (USDJPY increase) sent the pair screaming higher where it barely reacted at the yellow .382 — not even dropping to the next lower Fib level.Another QQE expansion sent it spiking out of the huge channel and up to the yellow .618 at 120.11 where it was quite overdue for a retracement.  However, since the pair is carefully managed by the BoJ, and any decline is instantly translated into falling equity prices (thanks to the yen carry trade), it was, again, not really permitted to react.

It has occasionally drifted lower, but as soon as equities start sagging it is immediately brought right back up to that key Fib level.  Finally, this past May, it broke out.  But, it almost immediately ran into the rising purple channel that broke down back in 2008.

This backtest has proven problematic for USDJPY’s continued upside, as has the BoJ’s pause in announcing additional QQE.  USDJPY dropped and almost backtested the .618 in July.  Stocks were not pleased.  But, it was nothing compared to the bloodbath that ensued when USDJPY dropped below the .618 in last August.

That’s when the wheels came off the bus.

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In an impressive pump by both CL and USDJPY, ES rallied 14 points off its weekend lows and is now sitting at a slight gain.  This has, of course, become a trend over the past month.  In fact, it’s gotten to the point where TPTB don’t really seem to mind if it’s blatantly obvious. continued for members… (more…)

Now under way… subscribe to pebblewriter.com and enter the code “Black Friday” in the space provided for a cool 68% savings off the first year of a regular Annual Membership — only about $2/day!

Better yet, lock in your savings with a Charter Annual Membership.  For about $2.60/day, your price is guaranteed to never increase. 

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With the holiday-shortened hours today, I’ll focus on catching up on some secondary charts.  In the meantime, look for ES to backtest the SMA20 at 2077ish and for CL to regulate whether it dips much lower than that.

It has a chance to break out on a small, completed IH&S (purple) on Wednesday.  It backed off, choosing instead to wait until yesterday when it completed a larger IH&S (red) — which it also failed to follow through on.CL is repeating last week’s pattern of dipping overnight.  The question is always whether or not it’ll rebound back to the rising purple channel, ramping stocks higher in time for the close. For its part, USDJPY is poking up above the falling white channel top — with the key word being “falling.”  The regular pre-opening ramp has been underway since 3am.  One would think traders would catch on to this pattern of rallying during NYSE market hours, followed by new lows.

But, traders are far outweighed by the influence of algos, which care not about such things.  When USDJPY rallies, they’re right there with it.  Though a concurrently falling CL, as we’ve seen, can outweigh the bullish impact.Should our initial target not hold, there are a number of more interesting (and more supportive targets down below.)  Some key moving averages, in particular, are long overdue for a backtest.

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For the fifth time in the past week, DX is threatening to break out.  Today, it’s courtesy of a “leaked” threat by the ECB to lower interest rates even further.  Somehow, even more negative interest rates are supposed to help the eurozone with its various and sundry problems.

DX is, yet again, pushing above its .886 Fib — if only intra-day — but, faces serious overhead resistance just above.

EURUSD is also pushing below its .886.  But, as we discussed in our last update, faces serious support just below.Will they both break out/down in the coming days?  Only central bankers know for sure.  But, it’s important to realize that it’s all just a smoke screen.

That’s right.  The real action is taking place daily in USDJPY and CL — both of which are obviously affected by the dollar’s actions.  Both are being used in a virtual tag team of well-timed bounces to instigate rallies and prevent drops.

The pattern lately has been quite consistent.  USDJPY is letting some air out after its rising channel from mid-Oct recently broke down.  After ramping stocks higher the day before and resetting overnight, it drops just before the open.  CL, for its part, drops overnight, then rallies at the open to provide cover for USDJPY’s drop.  An hour or so into the session, USDJPY finds its feet and starts a steady climb throughout the day to pump stocks higher — or at least prevent further drops.Note that today was different.  Very different.  And, there’s an important reason why.

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