In September’s update on RUT, I posted the following chart, showing both upside and downside targets for the index depending on how central bankers’ pronouncements were received over the next few days.

It never occurred to me that both the upside and downside targets would prove to be correct (and, eerily correct, at that.)

If that weren’t eerie enough, the index is, again, sitting at the gray channel midline, waiting to react to what central bankers have to say over the next few days.

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Another day, another central bank announcement.  Actually, make that two central banks, and the big one yet to come on Friday.

In an effort to keep up with the ECB, Sweden’s Riksbank went all-in’er earlier this morning.  Around and around they go, waiting for the music to stop….

As with any other FOMC announcement day, I recommend not trading — at least until the dust settles.  Today, I’m putting my keyboard where my mouth is and will use the next several hours until the announcement to update as many charts as possible.

Last night, I posted an update to EURUSD.  And, earlier in the week, I updated both NYSE and DJIA.  If there’s a general theme to the big picture, it’s this:

Having failed to generate real industrial growth and real income growth, central banks are focused on reinflating asset values and protecting their share of international trade through currency debasement and ZIRP (or, NIRP in some cases.)

The chief driver of stock prices [see: What Really Drives Stock Prices?] continues to be the USDJPY which, now that it rests atop the critical .618 Fib at 120.11 and a bevy of moving averages, seems poised to break out.  If the “market” is to top May’s highs,  it needs USDJPY to break out.

And, that’s where things get complicated.  Because, right now, the US dollar chart suggests it’s done rising for the time being.  Having exhausted all its energy to drive SPX above its 200-day moving average, the old gal needs a breather.Arguing the opposite case is EURUSD, which has been on life support since breaking below channel support last Friday [see: Update on EURUSD.]

I know what you’re thinking:  is there a scenario where USDJPY can break out (yen weakness, dollar strength), EURUSD can break down (euro weakness, dollar strength) and the US dollar can also weaken?

Glad you asked.

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EURUSD has declined to within .0056 (1.0995 vs 1.0939) of our downside target from September’s forecast.  It took a bit longer than anticipated, which wouldn’t much matter except that it means the pair departed from a well-defined trend channel.

In early September, it appeared that EURUSD was within a few days of reaching the .618 Fib at 1.0939.  The pair was settling back down after spiking to the channel top (peak 1, below) to help SPX recover from its late-August correction.

But, rather than make the obvious tag, EURUSD suddenly reversed (the white arrow) and backtested the purple channel’s midline a second time.  This had the desired effect of helping to prevent another leg lower for stocks, as can be seen in the SPX chart below. In a world where USDJPY is seemingly all that matters anymore, EURUSD did an admirable job of pinch-hitting.

But, as mentioned above, the delay had repercussions for EURUSD and, potentially, stocks as well.

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Our initial downside target yesterday was the SMA200. It looked to be in the bag, as the white channel line intersected the daily SMA200 at exactly the same time as would the 5-min SMA200 (another common intraday target.)

And, since SPX had fallen below the purple channel .786 line, a drop to the midline was potentially in the cards as a secondary target.

USDJPY was cooperating, having reversed below the SMA200.  It was even tracing out a nifty little falling channel.  But, as we noted earlier in the session [see: Central Banks Can Relax]:

[USDJPY] is the key chart to watch, as TPTB will want to keep it within striking distance of its SMA200 in case stocks start looking too wonky.  A quick ramp back to the SMA200 should fix things in a hurry.

Apparently a 9-pt dip in SPX was much too wonky for The Powers That Be.  The perfectly good falling white channel in USDJPY was interrupted (the white arrow, a very unnatural spot) so that USDJPY could head back to the SMA200.  The impact on SPX was almost immediate.  It popped through its clearly defined channel and spent the rest of the day oscillating higher — never once dipping below the green, dashed TL in the chart below.

There would be no SMA200 tag during the cash session.  The only way US traders could play the backtest would be to:

(1) stay short overnight, and run the risk of waking up to a big loss
(2) stay up all night and watch it like a hawk
(3) stay short, but hedge your position (or use stops, if playing futures)

I’ve tried all three approaches many times.  And, trust me, none of them are particularly effective or enjoyable.

I’ve been hit with many 3AM ramp jobs that nullified good patterns and left me with a loss.  I’ve pulled all-nighters, only to see the eminis easily propped up in the low-volume environment.  And, I’ve seen way too many stop-running exercises that prey on cautious investors.

The “market” has always been manipulated.  But, in the old days, it was just as likely to result in a dip as it was a spike higher.  Not any more.  These days, the regulators are quick to prosecute HFT’s and algos that results in market corrections.  But, if you manipulate it higher, you have nothing to fear.

After all, the biggest manipulators of all are the central banks themselves, with both direct and indirect intervention whenever things are getting out of control — or, they simply want to push indices past overhead resistance.

That’s what last week was all about: SPX topping its SMA100 and SMA200.  It was driven entirely by USDJPY’s manipulation higher.  If this comes as news to you, please take 10 minutes to read the recent post:

What Really Drives Stock Prices?

Whatever pattern seems to be unfolding, whatever target appears obvious, they’re easily avoidable by the simplest of means: pushing the easily-manipulated USDJPY a little higher.

We don’t have to look far for more proof.  As soon as cash markets closed yesterday (the red arrow) USDJPY continued to our downside targets: the bottom of the red channel, and on down to the .618 Fib at 120.11.  The goal was for SPX to tag its SMA200 at the open — when cash traders would be unable to participate.  And, it almost worked out that way.

Traders saw USDJPY bouncing before it even reached 120.11 and were quick to flip back to long positions.  It’s only now, almost 3 hours later, that SPX appears ready to finally reach 2060.

After all this drama and subterfuge, will SPX get a big bounce there?  It’s not as clear cut as one might think.

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The two charts on everyone’s minds this week are the meeting schedules of the FOMC and BOJ.  The Fed gets started tomorrow and announces Wednesday, and the BoJ bats clean-up on Friday.The FOMC has been fostering sentiment that they’ll do something.  And, the BoJ has been downplaying their interest in doing anything.  From a market standpoint, it doesn’t matter all that much, as they already got what they wanted without lifting a quantitative finger.

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In our September update, I noted that NYA had plunged below a year-old channel bottom, only to reach the bottom of an even longer-term channel — seen below in white. It struggled for over a month to climb back above the shorter-term channel bottom.  Finally, in early October, it gapped back above.  Now, it’s found new potential resistance.

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In our September update, I noted that DJIA had dropped back below several potentially bearish lines in the sand in late August:

– the huge red channel
– the white 1.272 extension
– the megaphone upper bound

I went on to vent about how the Dow is one of the least reliable indices to forecast using patterns and Fibs.  It’s just too easily/heavily manipulated.

With BoJ and FOMC meetings coming up, I wondered:

Friday’s action, for instance, showed the index closing above the 1.272 and a potential falling channel midline.  Would it really surprise anyone if TPTB were able to push the Dow back above the megaphone/channel top, too?

Guess what?

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There are 3 important charts to consider, today:

DX has reached the top of its falling channel.USDJPY is testing its 200-day moving average at the top of its new, expanded triangle.And, ES just tagged the .786 Fib, the bottom of the broken purple channel, and the .236 line of the rising white channel from 2009.   For now, at least, it has broken out of the falling white channel.  The trick will be remaining above it and maintaining momentum.

Given the stakes, it’s not hard to see why the world’s central banks are united in their efforts to direct our attention from disappointing revenues, overleveraged states and the fact that the “market’s” performance has been mostly driven by currency manipulation (the yen carry trade) and direct intervention in equities.

We looked yesterday at how it works [see: What Really Drives Stock Prices.] The question today is “will it work?”

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Who runs the stock market?  What determines where prices go over time, on a daily basis, or even moment-to-moment?  Is it the economy, interest rates, earnings, capital flows?

Today was a not-too-subtle reminder that the yen carry trade is still very much in charge of the market, whether day-to-day or moment-to-moment.

For more on the yen carry trade, CLICK HERE.

The S&P 500 has essentially doubled since the BoJ declared war on the yen in late 2011. But, it ran out of steam once USDJPY had recouped 61.8% of its losses since its 1998 highs.

In the world of Fibonacci patterns, the .618 retracement is the most important level of all.  [You needn’t believe in Fibonacci patterns; but, it’s important to know that many investors do…and, trade accordingly.]

For more on Fibonacci levels, CLICK HERE. 

According to the principles of Fibonacci, financial instruments nearly always reverse upon reaching the .618 retracement — generally to at least the .500 and frequently to the .382 or .236 levels.  A drop of that magnitude would have been a huge blow to the trillions of dollars tied to the price of the yen.So, reaching the .618 at 120.11 was an important warning sign for investors.  They began to pay a great deal of attention whenever USDJPY neared 120.11, reasoning that it was an important clue as to whether or not the yen would continue to weaken (USDJPY and stocks would rise) or strengthen (USDJPY and stocks would decline.)

USDJPY deserved all that attention.  It tagged or crossed 120.11 a full 33% of the sessions between early December and mid-May.  But, it managed to remain on an upward trajectory as shown by the red channel below.Stocks followed along, dipping when USDJPY tumbled toward or below 120.11 and rising when it rose above (or, even threatened to.)  Everything went well until early June, when USDJPY finally backtested the huge rising purple channel (the white dot in the above chart.)

USDJPY shed 7.5% over the next two months, while SPX plunged over 12.5% — its biggest correction since the summer of 2011.  It didn’t help that SPX, itself, had completed a huge Butterfly Pattern, reversing at its 1.618 extension; see: The Last Big Butterfly.]

The coincident corrections intensified interest in the yen carry trade.  Even mainstream financial media began discussing the importance of 120 in the USDJPY.  But, for those of us who’ve studied the yen carry trade, the events of August 2015 confirmed what we already knew:

• Want stocks to go up? Push USDJPY higher, preferably above 120.11.
• Want to allow stocks to decline?  Stop propping up USDJPY.

It’s a simple set of rules with remarkably few caveats. It nearly always works.  The trick, of course, is anticipating which way USDJPY is going and, when it’s about to reverse.

Following the Aug 24 plunge, for instance, USDJPY bounced around quite a bit.  It took a few days, but it soon became apparent that it was developing a narrowing triangle — a consolidation pattern.  This made it possible to time long and short positions in the market fairly accurately.

The hourly chart below shows that ES reversed whenever USDJPY tagged the top or bottom of the pattern.  The one notable exception was between Oct 13-20, when oil — following an 11% plunge — rallied almost 6% while USDJPY floundered.

This brings up one of the most important caveats: the yen carry trade isn’t always in charge (just most of the time.)  Crude light oil futures (CL) are frequently used to goose stocks higher.  In fact, today was one of those days.

The chart below shows today’s action in USDJPY and ES minute-by-minute.  Mario Draghi was announcing a continuation of PSPP (the ECB’s version of QE.)  He had nothing new to say, but it was important that the “market” react positively in order to reaffirm the wisdom of the ECB’s actions.

USDJPY spiked the minute Draghi’s press conference started, rising from its overnight low of 119.61 to 120.33 by the time the cash markets opened.  A 0.6% increase in one hour is a big move for currency pairs.  But, the really bullish aspect of the move was that the pair sailed right through 120.11, backtested it, and continued soaring.

The S&P 500 futures were up 13 points from their overnight lows by the time the cash markets opened.  Once SPX was open, it quickly surmounted its 100-day moving average.  It didn’t stop until USDJPY ran into some important resistance — the top of its new, expanded triangle.

At that point, SPX and ES began falling rather precipitously. Having risen 34 points, ES quickly shed 14 of them before CL — which had plunged 2.6% since the market opened — suddenly sprung back to life.  The algos loved this, and quickly forgave USDJPY’s decline.

Of course, by then USDJPY had already started rebounding.  Together, USDJPY and CL drove stocks higher through the close.  SPX regained 12 of the 14 points it had lost and closed with a 33-pt gain (1.66%.)  ES continued even higher after hours, tagging its 200-day moving average for good measure.

If you’ve read this far, I commend you.  You now understand what drives markets better than 99% of all investors.  If you already knew most of this, consider this article a friendly reminder of the degree to which a very small number of people control the so-called markets.  And, they’re not about to give up.

The BoJ and GPIF’s equity holdings are equal to 15% of Japan’s GDP.  Given that every 1% decline in the Nikkei costs them $6.7 billion, they are hopelessly trapped in an failed experiment of their own making.

For more, see: Japan’s Equity Trap

Bottom line: Draghi promises more of the same while refusing to answer the “explain why more inflation is good for citizens” question.

The EURUSD is selling off and might just reach the bottom of the rising channel established several days after the actual PSPP announcement back in March.This might normally be detrimental to stocks… …but for the fact that the USDJPY has been dramatically ramped back to and above the critical .618 Fib at 120.11.  So, ignore the EURUSD and keep an eye on USDJPY.  As usual, it’s all that matters as long as the yen carry trade is alive and well.

If you’re hip to the yen carry trade, you’ve seen this drill before.  But, if you’re like most investors out there, you’ll see that Draghi spoke and the “market” rose and assume that whatever this asswipe said must be good for the “economy.”

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