The overnight news cycle has all the earmarks of events spiraling out of control. Yet, consider that:
In other words, the news cycle has actually accommodated our charts, confirming tops/bottoms we called and enabling other targets to be met.
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Today, EURUSD reached a key technical level, completing a Bat Pattern that should see it rebound strongly. We’ve been anticipating this day ever since DX broke out three weeks ago.
And, it begs the question: if EURUSD rebounds and the US dollar falls, what might become of USDJPY — the single biggest factor in driving stock prices?
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Since SPX completed a Bat Pattern on Nov 2 [see: Beware the Bat] it fell a normal enough 97 points to just below the .618 Fib. Though, as I recently pointed out, the bulk of those points came in gaps lower in the opening minutes and were, thus, only available to futures investors or those willing to hold short overnight — a dangerous game for many years, now.
They also came almost entirely courtesy of a carefully controlled decline (purple channel) in USDJPY which merely took it from the top to the bottom of a steeply rising (white) channel. So, we took notice last week when the channel that’s guided USDJPY higher since Oct 15 finally broke down.
Surely, it would precipitate an overdue drop in equities — or, at least make a dent in the acceleration channel that’s guided the 77-pt rally since the Nov 16 lows. But, that’s not what TPTB had in mind at all.
As we anticipated on Nov 13 [see: Why Oil Should Bounce Here] CL bottomed out and began a vigorous 7% bounce that, combined with well-timed USDJPY ramp jobs, produced just enough reason for the algos to stay happy. Thus the melt-up was spared any unsightly divots.
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Another OPEX, another overnight ramp job – this one courtesy of Mario Draghi who, not so surprisingly, is prepared to do whatever it takes to blah, blah, blah…
ES rallied 11 points off the overnight lows, while USDJPY has been working to put a damper on things. Could it have anything to do with max pain being way down at 2050 today?
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Isn’t it swell that the “market” can soar 33 points on nothing more than the repetition of bad news? Despite the talking heads pleas, there is nothing fundamentally good about higher interest rates unless you’re a financial institution. And, even then, there will be winners and losers.
The post-minutes algos kicked in as they always seem to — perhaps in an effort to assure those few human investors left that the FOMC’s utterances are always wise, always bullish.
In reality, it was our old friend USDJPY which was almost solely responsible for the melt-up — as it has been for well over a month.
So, it’ll be interesting to watch what happens as it again approaches channel support this morning. Will it hold again, or will TPTB allow a little off the top, just for appearances sake?
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The US dollar’s breakout from a long-standing falling channel on Oct 28 was accomplished with the assistance of the euro and the yen — both of which have been steadily weakening.
What might it mean, then, that the dollar just reached a point of important overhead resistance as the other two reached important support? Might it take on added importance since, as BofA/Merrill pointed out yesterday, the long dollar is currently the most crowded trade?
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As scary as last week’s drop was to some investors, we saw it as the natural result of a Bat Pattern completion. From Nov 3, the day SPX topped out at 2116.48:
SPX reached our upside target of 2104.21, completing a Bat Pattern at the 88.6% retracement of the drop from 2134 (May 20) to 1867.08 (Aug 24.) The normal repercussions of a Bat completion would point to at least the .618 [2032.48] or below.
As SPX dipped below our 2032.48 targeton Friday, it seemed like things were getting out of control. Still, our charts indicated otherwise. From Friday’s post:
From a technical standpoint, the bounce is having a hard time getting underway. I can only take this to mean that the MM’s are purposefully creating confusion for the purpose of shaking loose weaker players before whatever comes next — which still appears to be a big bounce… Think of all the great short bets over this past week that only paid off if someone was willing to hold overnight. I believe this is the flip side — a well-designed bear trap.
After yesterday’s stunning 33-pt rally, it’s now pretty clear that it was, indeed a bear trap.
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Having utterly failed to arrest Japan’s economic malaise since its inception, will QQE suit up once again now that Japan has officially entered its fifth recession of the past six years? From zerohedge.com:
Don’t look for Abe or Kuroda to fall on their swords. Because, while debasing the yen has obviously done nothing to fix the Japanese economy, it has done wonders for the Nikkei.
And, if that story sounds familiar, turn to this morning’s Empire State Manufacturing report from the NY Fed. The latest miss (-10.74 vs expected -6.34) is the fourth monthly contraction in a row (most since the financial crisis) and the 9th of the past 10 months.
Makes it tough to believe the FOMC will really raise rates next month, no? We’ll see if the “market” views it this way, taking the bad news as good from a Fed intervention standpoint…
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Not since Moe, Larry and Curly Joe struck oil has the industry had such trouble balancing supply and demand. While there’s plenty of bickering about the fundamentals, I’ve found that CL’s price action is an excellent gauge of what to expect.
It’s been fairly easy to forecast. We called the March bottom very accurately [see: Mar 17 Update on Oil], and were only a few days early in August [see: Oil Bottoms Out.]
As we’ve discussed many times, the supply/demand picture is no longer the most important factor in CL’s pricing. It’s now a part of the central planners’ toolkit of essential levers.
They’ll force prices lower if Japan devalues the yen, thus facilitating the yen carry trade. Otherwise, CL always seems to find a reason to bounce. It’s very much a “carrot or stick” proposition.
From An Offer Japan Can’t Refuse back in September:
One of my more outrageous theories advanced back in March [see: Those Wacky Central Bankers] suggests that oil’s price crash over the past year was engineered in order to induce Japan to further weaken the yen.
The relationship is pretty easy to see, especially at important inflection points such as Aug 2014.
In case you hadn’t noticed, it’s happening again. USDJPY bounced 6.4% off Aug 24’s lows, and is back near its pre-correction highs. CL bounced too, but has given up most of those gains — plunging 21% since its Oct highs.
It’s where it plunged to that has me intrigued.
Remember the channel bottom that CL dipped below on Aug 24? Looked really touch and go? Like it might fall off the edge of the earth? It’s baaaack.
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Channel bottoms don’t always mean a bounce. But, when something doesn’t bounce at a channel bottom, it usually plunges sharply. Failure at potential support makes folks nervous, and nervous folks sell.
In this case, there’s even another channel that should provide support. And, if that support doesn’t materialize, the .886 Fib should make for a good backstop.
Will we get a big bounce here? That depends mostly on whether or not USDJPY breaks out. Last week was a great start, spiking higher through the SMA100 on the latest ECB brilliance.
Given how far CL has fallen in the past week, central planners have probably already secured a pledge from the BoJ to break USDJPY out of its week-old slump. If so, stocks can get on with their rebound.
If CL drops below all this support, it has one last chance at 37.07. If it drops through 37.07, then it’s a long way down to 26.22. And, it would mean the BoJ has pledged to ramp USDJPY to a new level altogether — one geared to produce new highs in the near future.
Stay tuned.
