In a maneuver that epitomizes the degree of control central bankers still have over “markets,” the USDJPY landed precisely at the apex of the Pennant Pattern that governed it fpr two month the August 24 meltdown.
This, on the heels of Japan’s worst export data in over a year — more proof of Abenomics’ abject failure, and more fodder for the QQE expansion expectations.
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As we discussed yesterday, this week is shaping up as a waiting game.
Given the propping up that’s going on, I’m going to assume that the ECB triangle has already begun. Any sizable moves will likely come in the opening hour (or even minutes) and the rest of the days will be about backfilling and testing the top/bottom of a narrowing triangle with apex on Thursday.
We certainly saw this over the last 24 hours, when USDJPY and CL conspired to keep SPX from declining during trading hours (dark blue), and the reset occurred overnight (lighter blue.)
Last night, however, there was an important twist involving USDJPY.
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USDJPY’s 50-day moving average dropped below its 200-day moving average on Friday. In technical analysis, this is known as a death cross and is ordinarily considered a rather bearish development.
The last time it happened, it precipitated SPX’s second biggest drop of the year. But, it is remembered more for the BOJ’s reaction than for that or the even bigger plunge that followed.
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In yesterday’s post This is a Test, we wondered how the “markets” would handle USDJPY’s departure from the Pennant Pattern it’s been in since Aug 25.
After declining to last week’s 118.16 target, USDJPY behaved pretty much as expected:
And, note that the 118.26 tag does, in fact, reaffirm the white channel bottom while suggesting that the rapidly rising purple channel might finally be ditched…Whatever big resistance SPX runs into today, USDJPY can overcome it with a rapid spike back to the purple channel bottom.
USDJPY did, in fact, spike back into the purple channel that has kept in on the rise since last December. The result was a 1.5% gain in SPX, though it had some help from central bankers, horrid economic news, today’s OPEX.
For all the excitement, ES ended up at a key overhead resistance — though SPX still has a few points to go.
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In our March 13 Update on DX, I noted that DX was approaching the 61.8% retracement of the drop between 2001 to 2008 and two key channel lines, writing at the time:
The white .618 intersects with two major channel lines… Should DX punch through, there’s much more upside. Otherwise, look for a correction in the very near future.
As fate would have it, March 13 itself was the high. DX didn’t go on up and tag the .618. Instead, it has been fading slightly ever since in a pattern that can’t decide between a flag pattern or a descending triangle.
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Can stocks rally in the face of a rising yen? We should find out today, as USDJPY reached our second downside target overnight. As we discussed in Tuesday’s members section:
The BoJ would love to morph USDJPY’s fluctuations into a (less aggressively) rising channel, but that means including some tags on the lower Fib levels such as the red .618. They’re more likely to chicken out at the rising red TL and purple .236 at 119.27 — especially if SPX is tanking.
Stocks might have tanked, but most of USDJPY’s downside was saved for the after hours, when ES is more easily manipulable. All the same, SPX came within 1.73 of our 1989 target in the members section of Pennant no More.
And, note that the 118.26 tag does, in fact, reaffirm the white channel bottom while suggesting that the rapidly rising purple channel might finally be ditched.
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Yesterday played out as expected, with a stop-running exercise that set a new high as we discussed last week.
But, this market is far from unrigged. Predatory HFTs use traders’ expectations of reversals at Fib levels to set them up.
It has already played out once, suckering those who bet on any kind of a reversal along the way since the 1871 bottom (there wasn’t one.) It may yet sucker in those who go long once 2020.86 is broached.
USDJPY closed outside the Pennant Pattern yesterday for the first time since its inception on August 24. Furthermore, it tagged our initial downside target overnight. From yesterday’s members section:
The BoJ would love to morph USDJPY’s fluctuations into a rising channel, but that means including some tags on the lower Fib levels such as the red .618. They’re more likely to chicken out at the rising red TL and purple .236 at 119.27 — especially if SPX is tanking.
By waiting until after the cash market closed, most of the damage to stocks was avoided. But, with 15 minutes until the market opens, I suspect SPX will reach yesterday’s downside targets with little trouble.
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USDJPY’s Pennant continues to drive markets. Today, it’s lower.
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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 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 back down and backtested the .618 (well, almost…stocks had a hissy fit) before zipping back up to retrace .886 of that particular drop on Aug 12.
That’s when the wheels came off the bus. China and nearly all of SE Asia was in trouble, and all that hot money was flooding back into and strengthening the yen (weakening USDJPY.)
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With the bond market closed today and volume expected to be minimal, I’m taking the opportunity to update a number of secondary charts. We’ll start with an overview of the big picture.
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In December 2013, the S&P 500, along with other key indices, had reached important technical resistance: a huge Butterfly Pattern at 1823, set up by the decline from 2007 to 2009. Rather than reverse, though, it was forced higher by the yen carry trade. The yen was aggressively monkey-hammered, USDJPY spiked right through resistance, and stocks did the same.
It was the second big success for the yen carry trade since the BoJ put a floor under USDJPY in 2011. But, the celebration was short-lived. Central planners were growing increasingly uneasy about the repercussions of the yen’s continual devaluation.
Bashing the yen made stocks more valuable and helped exporters, but it made everything Japan imported more expensive — especially oil, which is priced in US Dollars. Energy prices, conveniently excluded from Japan’s CPI calculations, had soared 27% since Fukushima.
Higher energy prices not only hurt Japanese consumers and businesses, they complicated the argument for expanded QQE — which was necessary (the party line, at least) in order to cause much-needed inflation.
Seven months after USDJPY got the S&P 500 over the 1823 hump, stocks were starting to struggle again. USDJPY had been going sideways, and investors were starting to wonder if the carry trade had run its course. TPTB needed USDJPY to actually break out.
The only way to accommodate this without killing off Japanese consumers and businesses alike was to crash oil prices (or, at least stop propping them up.) And, that’s exactly what happened.
As the chart above shows, USDJPY’s breakout from that protracted consolidation occurred at exactly the same time that CL started crashing.
And, everyone would have lived happily ever after… except for the fact that the carry trade relies on the yen continuing to devalue. Sideways doesn’t cut it.
Last December, USDJPY reached the critical .618 Fib retracement of its losses from 147 to 75, and has since gone essentially nowhere. Without the guarantee of the yen carry trade to propel it higher, SPX topped out in May and has been dropping ever since.
Bottom line, it’s time for another boost. If you find yourself thinking “wait a minute; this has to end eventually,” congratulations! You are smarter than all the central bankers in the world put together. They’re addicted to the “benefits” of the yen carry trade: higher stock prices. And, like any addict, they can’t see beyond the need for one more fix.
But, keeping the carry trade going means oil has to decline even further — which presents other problems. The fracking industry, for instance, is hanging by a thread. Worse yet (from their standpoint, not mine), the banks financing all that activity are feeling the pain of all those borrowers going belly up.
While TPTB might not care much about frackers, they do care about bankers (or, at least a couple of them would be in jail by now.) So, they’re at an interesting juncture with no great choices:
The one factor I haven’t mentioned is that between the BoJ and the GPIF, the Japanese government owns about $700 billion in stocks. That’s almost 15% of its GDP. And, given that Japan is leveraged to the tune of 240%, their stock holdings should be considered heavily margined. I wrote about this two months ago in Japan’s Equity Trap.
Anyone who’s ever been heavily-leveraged and upside-down on a huge bet knows what desperation is all about. And, though you’d never guess from their speeches and press releases, Abe and Kuroda must be feeling pretty desperate right about now.
The BoJ has another monetary policy meeting coming up on October 30. All investors will remember last October 31, when the last big expansion of QQE (with help from Jim Bullard) rescued stock markets from the biggest decline since 2011.
Will we see a repeat performance? I think so. Central bankers have consistently deferred to the institutions which caused the financial crisis in the first place. I can’t see that changing anytime soon.
Sure, they’ve painted themselves into a corner with respect to oil prices. But, when was the last time a central banker stood up and admitted that QE was a huge mistake — a zero sum game which shifted rather than created wealth and which should be unwound regardless of the impact on the stock market?
Stay tuned.
