Another night of USDJPY ramping took ES up to 2014.  It’s not significant in and of itself, but it is slightly higher than the Sep 17 high of 2011.75.  In the world of Fibonacci Patterns, this means that the red grid set up by the Aug 24 bottom and the Sep 17 top is technically kaput.Ordinarily, this would be a very bullish development.  But, in a world run by currency manipulators and HFT’s it has more often than not been a head fake.

Note that USDJPY and CL have both reached important reversal points, meaning that this morning’s initial gains should be faded.

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The only caveat is that ES is only 21 points away from its SMA100, and could be ramped up there quite easily by USDJPY popping up above the Pennant top as happened back on Sep 24.  Odds are that SPX is also being primed to bust its Fib top at 2020.86.

A glance at the 5-min chart shows strong and rising SMA support that should be able to get USDJPY to the purple .786 and SPX up to 2020.87.

From there, note that there have been few reversals since SPX 1871.  Today it should at least backtest the white and gray midlines and SMA50 at 1995 – provided that USDJPY respects the Pennant top.

UPDATE:  9:48 AM

Almost there.  I’ve always said that the most dangerous time for Harmonic Pattern traders is the space in between the .886 and the previous high.  Is it a Bat Pattern that’s running a little over or will we see new highs?

In unrigged markets, it’s normal to see a reversal at the .886.  Those who rode out a stock’s decline are relieved to be back near its previous highs, and sell once it gets “close enough.”  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.

They’d pile in on the long side (many as a result of being stopped out) and face a sell-off as USDJPY reverses at the Pennant top.  Since few investors are even aware of it or its influence, they’d never see it coming.   And, since it’s the weekend, they’d have to decide whether to risk holding long or not.

If the sell-off, whether today or Monday, is violent enough, they can be counted on to dump their new long position just in time for USDJPY to pop above the Pennant top and run SPX back towards the approaching SMA100.

The SMA100 should reach the purple .618 and red channel top sometime next week, and makes for an appealing target — that is, unless our 2011 analog works as it should.  As much as I would love it to play out, its odds of doing so are fading daily — at least in the prescribed time frame.

A drop either later today or Monday would be a good start.

UPDATE:  11:06 AM

SPX came within 73 cents earlier, when USDJPY suddenly reversed lower.

Here’s a close-up in 1-min charts.  The timing was exactly the same (9:54 EST) in both, meaning that SPX has been completely locked in by USDJPY today.  No rigging here… USDJPY can do this all day, meaning it could be 4 1/2 more hours of watching and wondering, knowing all along that whatever the final move is will be irrelevant because of the odds of it being a head fake.

Given the non-existent volume, it’s apparent that most traders have had enough of this crap and are getting an early start to their weekend.

The only move that would get me interested in trading right now is a push below the SMA50 at the yellow TL (2012.70ish), which would signal a probable backtest of the SMA100 where it crosses 2003.88.  It would be a potential 9-point move, meaning a whopping 4/10%.    If it got going, however, then our 1995 target suddenly comes into play — more like The SMA100 should reach the .886 a little after 12:00 today, so the whole thing would need to get started pretty soon.

And, it would need to be accompanied by USDJPY pushing below its moving averages and the purple channel midline.UPDATE:  11:55 AM

Here we go.  SPX is just about to the TL and SMA50.  It’ll either bounce here or be a nice little short targeting 2003.88.  Watching USDJPY for a sign…FYI, I have to be out of the office for a meeting from 12:45 – 2:30PM.

UPDATE:  12:11 PM

Tight stops are advised, as it already backtested the SMA10 and 20 and shouldn’t need to tag them again unless it’s going to rise back above.  Also, ES has TL support here.

UPDATE:  12:45 PM

As mentioned earlier, I have to run out for a meeting.  I’d stay short for 2003.88.  At that point, I’d look for a reversal or a bounce.  If a reversal, the next stop is >2020.86.

If it’s just a bounce, the best target is probably the top of the falling purple channel or the white SMA20 — wherever it happens to be at the time — with the purple SMA50 a secondary target.  And, then the decline would continue to the SMA50 at 1995ish.

At this point, everything feels very controlled.  But, if USDJPY gets going toward 120.11 — which it could easily reach by day’s end — then that will obviously accelerate things.  Keep an eye on it, and the purple channel which crosses 120.11 at 2:30ish.I should be back around 2:15pm.

UPDATE:  2:23 PM

My best guess at this point is 2003.88 won’t come until the close — if then.  Note the SMA200 has really flattened out, and is unlikely to top 2000 by the end of the session.If USDJPY could break down below the white TL (also a neckline for a little H&S) then I’d get excited about more downside, but right now this is proving to be too carefully controlled.UPDATE:  2:29 PM

USDJPY just backtested the purple midline, so there’s at least a chance for a reversal at SPX’s SMA50.UPDATE:  2:52 PM

CL playing games now.  A 1% move in 3 minutes in order to help SPX break above the SMA10/20 combo a few minutes ago.  Now it’s refusing to let up, and SPX just broke out of the other, less aggressive falling channel that might have allowed it to reach 1994 by EOD.

I would fade this bounce.  The SMA100/200 tags provided a nice reversal that should see CL back down to new lows: 37.07 and quite possibly the .886 at 26.22.

Note that ES is backtesting the broken TL connecting last night’s lows.UPDATE: 3:30 PM

In technical terms, it ain’t happening.  Closing out the short here at 2013.06 and calling it a day.  I’d not be surprised to see follow through on Monday — especially since USDJPY did tag the top of the Pennant and the next move should be to the bottom.Would I go long here?  I don’t see any problem with it into the close, using the SMA10 as a guide for trailing stops.  Just know that it’s just as likely to close right where it is.  ES’s VWAP is at 2006.45, and it’s already sitting at 2007.5 right now.

UPDATE:  3:50 PM

USDJPY suggesting a sell-off at the close.  With only 8 min to go, hard to imagine it amounting to much.  If it starts plunging, though, hit the sell button as quickly as possible.

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FOMC days (minutes are due out at 2PM) are often characterized by markets bouncing back and forth within a tight triangle until the big event occurs.  At that point, they bounce wildly higher or lower — careening off support and resistance only minutes apart before finally settling on a direction and the algos kick in.

I see no reason why today should be any different.  And, the upside and downside targets are pretty clear.

USDJPY dipped to the bottom of the Pennant Pattern again last night.  While it’s pretty easy to keep this game going for a while, the trick is in the timing.  By holding off on the bottom tag until after the close, TPTB were able to minimize the impact on stocks.

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Last day of our membership promotion.  Rather than dragging it out, let’s make this fun. 

The next 5 new members who sign up for a charter annual membership will earn an immediate $200 rebate.  That works out to $899 for your first year — only $2.46 per day! 

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It came a day early — I charted it as Oct 8 back on the 25th [see: USDJPY’s Triangle Breaks] — but, today’s the day we find out whether or not our latest analog is worth a darn.  Yes, the 50-day moving average will be tagged this morning.

Last night, the BoJ punted on additional QQE (at this time, as we expected) and USDJPY plunged back below the key 120.11 Fib.

After seeing the effect on stocks, though (ES was off 22 points from yesterday’s highs) it was quick to find its way back — and without even testing the bottom of the pennant pattern.Thanks to that, as well as CL breaking to a new interim high [see yesterday’s post], ES ramped overnight to tag its SMA50.  SPX will clearly follow along on the opening.  The big question is whether or not it’ll stick.

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If USDJPY is the kingpin of stock manipulation, CL is more like the enforcer.  That is, if USDJPY is otherwise occupied in, say, a gang war with the yuan or the dollar, CL is more than happy to step in and ensure that stocks don’t seize the opportunity to stray from the “understanding” that there is only one direction in which they should spike.

So this morning, as USDJPY cools its heels waiting for the BoJ to come through with expanded easing, CL is up nearly 3.5% — gleefully kneecapping bears who had the nerve to bet against central banks’ omnipotence.It was enough of a move to break out of the triangle it’s been in since late August.  What does it mean for the bigger picture?

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For the last month or so, we’ve been tracking USDJPY’s movement through (and beyond) the Pennant Pattern that set up following the Aug 24 plunge.  Yesterday, USDJPY confirmed its importance by racing to the top of the Pennant and sitting there for the next 4 hours.  SPX dutifully followed along, logging in its second biggest day since last week’s bottom as traders anticipated a big breakout.

But, they were disappointed. There was no breakout. SPX reached the highest of our three targets yesterday, but USDJPY — not so much.  So, we’re sitting here this morning at pretty much the same spot that we left off yesterday.  And, the only chart that really matters today is this one:It’s the schedule of BoJ’s Monetary Policy Meetings.  If Kuroda, who is supposed to speak at 11pm, announces more easing, then the Pennant breaks out and the carry trade can go on to produce new highs.  If he doesn’t, then it’s back to the bottom — or lower — for more cellar dwelling, at least until the next meeting at the end of the month.

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For those who’ve recently joined as monthly, quarterly or semi-annual members, consider upgrading to an annual membership now.  Annual rates will revert to $1,650 when this promotion is over, and are slated to increase to $1,800 next month. 

And, don’t forget, referring a new annual member will earn you (or, share it with them) a cool $300.  Or join with a friend and split it.  Either way, it’s my way of saying thanks for sharing the word.

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Today marks the 30th session in a row where USDJPY’s Pennant Pattern will dictate the movements of the stock “market.”  USDJPY has not only bounced back into the Pennant, but has climbed back above the all-important 120.11 Fib level.  Futures are loving it, with ES currently up 13.25 with 15 minutes to go before the cash open.  But, as usual, there is a limit to the amount of fun one can have on the upside. In other words, there’s a reason ES has stopped right where it has.

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September will be remembered by many investors as an unsettling month.  But, as a trader, I don’t care much about which direction the market is going — as long as it’s going somewhere.   Like August, September had more than enough action and produced outstanding results at 35.24%.

Buy and hold investors took their lumps, as the S&P 500 slumped 2.6% and many other indices much more.  And, swing trading was nearly impossible due to the constant reversals.  But, day traders found plenty of opportunities among the frequent, huge swings.  The challenge was in figuring out which moves would play out, as there were many head fakes — particularly at the daily close.

The daily chart reflects the overall choppiness……but, the 60-min chart provides a much better sense of the crazy, intra-day swings as well as the gaps up and down at nearly every opening bell.This led to more frequent trading than I’d like.  But, the results were positive.  So, we’ll take the bad with the good, and pray for more trending markets going forward.

Gap Openings

There were 21 sessions in September.  The median move in the first hour alone was 20.4 points — most of them gaps higher or lower.

In fact, 17 of the 21 gapped higher or lower by at least 10 points at the bell.  And, trends were very hard to come by — with huge gaps lower one day frequently followed by sizable gaps higher the following day.

Intra-day Volatility

During September, the median daily range was a whopping 35.8 points.  The smallest daily range was 14.8 points and the greatest was 67 points.

The graph above depicts the daily range and whether the day was positive or negative.  It shows pretty clearly the unbelievably high whipsaw quotient for the month.

The Culprit

Our old friend USDJPY was responsible for most of the volatility in September.  The pair, which dictates almost all moves in the “markets” these days, was stuck in a Pennant Pattern which straddled the most important Fib level on the chart: the .618 Fib at 120.11.

By  bouncing back and forth between the upper and lower bounds, USDJPY guaranteed that stocks would also bounce back and forth — making big moves with lots of volatility, but no net gains.

Results

September’s results came in at a strong 35.24% — much higher than we would expect in a less volatile period such as earlier in the year.  Unfortunately, these results came at the expense of much greater activity.  We averaged 6.5 calls/day, which is at least twice the number I would prefer.  This was partly a result of the enormous volatility, and partly a result of the head fakes that continue to be so prevalent.

HFT’s and algos were quite active in the midst of all this volatility, particularly when a recovery from a sizable plunge was required.  Predatory algorithms, such those which push prices past an obvious reversal point and then reverse, after traders are stopped out, continue to plague the “markets.”

Drilling down into our daily activity, about half of our gains were from moves that were less than five points.  These accounted, however, for only 1/8th of our monthly return. So, eliminating some of these would be a desirable trade off.  I think it’s safe to say that most folks would have been fine with a 31% month involving half the number of trades.

Some of them can’t be eliminated — they’re the result of a bigger opportunity that’s scuttled by an unanticipated reversal.  In these cases, I’d rather close the trade quickly than suffer a loss.  At other times, it’s entirely possible.  If the upside potential from a trade is only a few points, I’ll try harder to ignore it in the first place.

Five points is probably a good threshold.  With a 10-pt threshold, by comparison, the number of trades would have been reduced by 85%, but the results would have been reduced by more than half.  Since our membership includes traders and investors with a variety of styles and time frames, I will endeavor to better define the size of the expected move when making a call.  That way, members may make their own decisions as to whether to pursue it.

A reminder: our membership promotion is officially under way. Save over 50% on an annual membership that protects you against future price increases.  It works out to about $3/day, not a bad price for some pretty terrific results. To sign up, CLICK HERE.

For those contemplating joining and wondering what a trading session is like, I’m going to open up today’s session to the public.  Follow along and we’ll see how it turns out.  So far, it’s looking like a better-than-average day.

* * * TODAY ONLY, OPEN ACCESS FOR NON-MEMBERS * * *

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I spent much of yesterday afternoon bemoaning the constant nudges higher in USDJPY that prevented SPX from even tagging the most basic of all support levels — the 200-period moving average (SMA200) on the 5-min chart.

SPX was a given, but USDJPY just wouldn’t allow it  — spurting back up into a rising channel every time SPX started to falter.  I finally gave up on the backtest and suggested:

And, the 1900 mark would still be an option for tomorrow morning.  That feels like more of a long shot, given how hard TPTB worked to get the averages back to green.

USDJPY has obviously been responsible, and is offering no clues to its next moves.  But, a dip overnight would certainly make sense.  If you can hedge overnight, a short position seems not too crazy.

Guess what?  Given the wretched unemployment numbers just released, the rest of the world now realizes what we’ve maintained all along: there will be no rate increase in October — or any other month in 2015.

Needless to say, this was not positive for the dollar, which is cratering against the euro and the yen.  I anticipated a drop to test the bottom of the Pennant Pattern (the red dot.)  But, what we got was much, much more.

Since the stock “market” lives and dies per the USDJPY’s direction, futures are currently off 29 points.  It looks like we’ll get that SPX2000 tag after all!

Given that the USDJPY just suffered its biggest single decline since August 24, might we expect more?

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Note that while the pennant is broken — at least for the moment — USDJPY is nearing channel support (the white line.)  It can be better seen on the daily chart — as can the purple channel bottom also in the vicinity.  Though, I’ll readily admit that on a channel that’s so long (from 2011, in the case of the white channel) it’s hard to say exactly where the bottom is.Bottom line, look for USDJPY to grab onto these lifelines and prevent an even worse decline in stocks.

If they’re very clever about it, and start ramping ES and USDJPY as soon as the market opens, they might be able to hold SPX’s losses to that white dot at 1899.It’s important, because as we pointed out yesterday it’s also the neckline of a Head & Shoulder Pattern targeting 1875.

I think it’s going to be tough to hold, however.  Consider how ES still has a long way to go in order to effect a decent retrace of the Aug 24 bounce.  1840 would make a lot of sense.

UPDATE:  9:34 AM

Getting some support here at 1898, but not enough that I’d want to jump in and buy.  1893 looks like a better opportunity, with 1878 as the ultimate target  — one we’re not likely to hit today if USDJPY’s decline is halted at 118.85.For once, the selling pressure might just be too much for the carry trade to hold back.  We’ll find out as USDJPY nears the white channel bottom.UPDATE:  9:36 AM

UPDATE:  9:41 AM

If I’m early, the other target is the neckline at 1902.84.

UPDATE:  9:55 AM

Everything’s back under control. Reached 1893.70, but they’re having trouble pushing it just a little lower.  USDJPY and CL still being forced lower, so should get there — maybe even a headfake overshoot.USDJPY still edging lower…UPDATE:  10:01 AM

That’s the problem with made to order “markets.”  When, USDJPY slows down, everybody knows a bottom is forthcoming.  And, no one wants to be the sucker to sell 30 cents above it.  Now, USDJPY will need to overshoot the bottom if they want SPX to tag 1893.03. If they can’t do it on this try, they’ll probably give up and wait for the SMAs to catch up and force it lower.

UPDATE:  10:07 AM

USDJPY just reached the purple channel bottom as well.  Should get a bounce any second. 

Just be aware that the 5-min SMA10 is approaching, and it sometimes exerts additional downward pressure.  Set your stops accordingly.  It wouldn’t be a bottom without a headfake or two.

Note that CL is getting into the act, pushing down — if even temporarily — below a key channel midline.  This suggests the downside isn’t done, but no guarantee it’ll be effective.

UPDATE:  10:16 AM

SPX back to the neckline and backtesting the SMA200 as USDJPY’s SMA10 catching up to it.  Last chance (for now) for a push lower.

If it retreats from the neckline, I’d consider another short position — but, only if USDJPY and CL support it.  And, at present, they’re not.  They’re both hanging around their SMA10s and going sideways.  And, SPX is back out of the purple channel — which can be considered a bullish backtest if it holds.  Next test for SPX is the SMA200 at 1905.65 — just beyond the neckline.

We’ll see how it does when USDJPY’s SMA200 arrives on the scene — which is about 1 minute from now.  A rally in USDJPY would require a bullish SMA10/20 cross.  And, that’s obviously easier to effect when the SMA20 is nearby.

UPDATE:  11:02 AM

SPX just tagged a red channel line and should take a breather here to let the SMAs catch up.  Could be worth shorting, but probably not more than a backtest of the SMA200, and it could be as little as a few points to the SMA100.  The .236 at 1914.16 is probably the better place.UPDATE:  11:07 AM

I’d look, first, for the intersection of the 10, 50 and 100-periods SMAs coming up at around 1910.43.  And, if that fails, the SMA200 at 1906.65.UPDATE:  11:20 AM

UPDATE:  11:38 AM

SPX taking a breather, waiting for the SMA10 to come along.  It should be a good guide for stops.

From here on, SPX’s goal is 1927.22, to bust the H&S Pattern by establishing a higher high.  The narrative must be changed from the failing carry trade to the probability of easier money from the Fed.

UPDATE:  11:50 AM

This is that time of day when things get kinda muddled.  We’re waiting for the SMA20 to catch up, USDJPY just ran into its  SMA50, the channel is in danger of breaking down.  It’s a good place to tighten up stops.

I don’t advise specific numbers, but go with what’s comfortable for you and your style of investing.  We’re up 30 points from our long entry, closer to 60 (+3.1%) if you held short overnight.

That’s a very good day, and not one you’d want to flush down the toilet if this turns into a Bat Pattern and goes to 1878.  I don’t think it will, at least not at this point.  But, you never know.  Nothing wrong with going to cash here and taking the rest of the day off.UPDATE:  12:01 PM

The problem with pushing higher at this point is USDJPY, which is about to run into the broken Pennant bottom.  If it has trouble pushing through, or hesitates much, stocks will get nervous and start selling off.

UPDATE:  12:09 PM Do or die time for USDJPY, which just pushed through the Pennant bottom – perhaps to get SPX to the red .146 at 1919.   If it retreats, look for SPX to follow along.  In other words, a potentially good shorting opportunity coming up.

UPDATE:  12:16 PM

…and, ES just reached its .618 retracement of last night’s highs. Look for USDJPY to backtest the Pennant bottom.Our 1927.22 target is just overhead, so tight stops are a very good idea.

UPDATE:  12:31 PM

UPDATE:  12:33 PM

I wouldn’t short just yet, as the typical MO is to wander sideways, with lots of random HFT-induced headfakes throughout the day, and finish the day at the highs.  1917.92 is a good target, as are the rising SMA100 and SMA200. UPDATE:  12:57 PM

Note, we’ve tagged the white .382 at 1928.81.  And, that very hard to see .618 at 1924.52 is a natural rebound for a Bat Pattern such as the one completed on Tuesday.  And, ES just reached the .786.UPDATE:  1:24 PM

Could get a bounce here if the midline is defended.  Best to dump the short here unless it pushes through.  The algos loathe giving up “hard-earned” gains, and the SMA20 at 1943.71 could be on this afternoon’s agenda.

Based on Friday’s highs, I might have drawn the falling red channel too low.  The midline might be closer to 1943 which, along with the .886 Fib at 1943.66, is a very appealing target.  Why not take advantage of some pretty impressive momentum to bag them now?

UPDATE:  1:43 PM

UPDATE:  2:17 PM

All dressed up and nowhere to go.  SPX still doing the crab walk……waiting for USDJPY to make up its mind.   The key Fib level of 120.11 is just overhead.  And, the promise of 120.11 is enough to keep stocks in the green.  If they tag it, there will be all sorts of expectations/complications.If they break the red channel, however, we’ll get some downside — even if it’s only a little.  4:00 is a long, long two hours away.

I suspect they’ll let USDJPY/SPX drift lower and pick up support from the rising SMA50 at 1921ish (blue dot) or the daily SMA10 at 1925.38 (white dot.)

Stay tuned.

UPDATE:  2:59 PM

SPX dipping below the channel midline at 1932.32.  Theoretical shorting opportunity for anyone who isn’t exhausted from this morning.  Should be good for 5-10 points.  USDJPY stuck going sideways, could still break either way.  So, if you play it, use tight stops. UPDATE:  3:09 PM

And, right back to the upside resistance.  The red channel line is around 1937.10 here.  If it’s broken, then 1943.66 should prove an attractive target — even if in the last 60 seconds.  But, this is silly time here. Why spoil a great day? I’m happy watching it without playing it.  UPDATE:  3:29 PM

There’s the .886/SMA20/channel tag we talked about in the 1:24 update.  Anyone who played this breakout should consider closing it here and getting started on your weekend.

If you’re a greedy bastard and aren’t satisfied with the 50 points since this morning’s call to go long, at least tighten up your stops.

If you’re feel incredibly lucky and want to temp fate, try shorting here into the close (1934-1939?)  But, if anyone asks, I didn’t say that.

EPILOGUE:

Pretty incredible day.  In all my looking around on the web over the past hour, I can hardly find anyone talking about USDJPY and the huge impact it had on the markets today — let alone its bounce at 10am at a critical support level.

In all, I show us scoring 70.39 points from last night’s close for a total of +3.69% in our theoretical SPX portfolio.  If you didn’t hold short overnight, it still amounts to 54.16 points for +2.85%.  Neither is shabby for an unleveraged, well diversified approach.

At +4.2% for the first two days in October, I might take tomorrow off.  But, I won’t.  Lots of charts to update after today.

For those who aren’t pebblewriter.com regulars, I wish I could say every day is like this.  This is probably the second best day we’ve had all year, falling short of Aug 25th’s +4.8%.  But, it’s just plain fun to produce gains when the market is tanking and the world is going haywire.

Whether it’s my service or someone else’s, I encourage investors to embrace both bullish and bearish markets.  In a volatile, go-nowhere market such as we’ve had since USDJPY flatlined in December, it affords opportunities to make money regardless of what’s going on.

Have a great weekend everyone.

P.S. I hope to get September’s results posted this afternoon.

A reminder: our membership promotion is officially under way. Save over 50% on an annual membership that protects you against future price increases.  It works out to about $3/day, not a bad price for some pretty terrific results.  To sign up, CLICK HERE.

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The leaks were flying fast and furious last night as everyone wants to know whether or not Japan will expand its QQE.  Bloomberg’s “unnamed source” insists it won’t – at least not any time soon:

Bank of Japan officials see little need for an immediate expansion of monetary stimulus and would prefer to hold off to get a clearer picture of the economic outlook, according to people familiar with their deliberations. 

Board members who gather for Oct. 6-7 policy meeting want opportunity to observe further economic data and developments in financial markets at home and abroad, according to the people, who asked not to be named because talks are private.

For those not on our distribution list, note that our membership promotion is officially under way. Click HERE for details on how to save over 50% on an annual membership that protects you against future price increases.

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Yesterday’s post title was a little tongue-in-cheek, as capitulation is normally thought of as a massive downward whoosh where the last remaining bulls panic and join the herd rushing for the exits.

In this case, I was thinking of the Bank of Japan, which is the key to this “market’s” recovery.  As we’ve maintained for the past six months, the yen carry trade has provided nearly all of the upside since 2011.  And, since USDJPY flat-lined last December, stocks have gone nowhere.

There’s a natural reticence on the part of the BoJ to further devalue the yen. It’s producing inflation (food and energy, which are not counted) but zero growth.  Even Abe’s closest advisor admitted last night that QQE has been an utter failure.  This was right before he went on to recommend expanding QQE.  From the Financial Times:

Japan needs more economic stimulus to stave off a serious shock from China, according to one of Prime Minister Shinzo Abe’s closest advisers.

Etsuro Honda, an architect of Abenomics in his role as special adviser to Mr Abe, said passing a supplementary budget to boost the stagnant economy was an “urgent task”.

“I don’t think we should call it a technical recession yet, but generally speaking, the Japanese economy is in a static situation,” Mr Honda said in an interview with the Financial Times. “It is not growing positively.”

As we discussed last month in Japan’s Equity Trap, Japan has no options other than expanding QQE.

They have amassed too much leverage, and used much of that leverage to accumulate ¥80 trillion in stocks — essentially on margin.  They are unwilling to write off those losses, so must do whatever they can to recoup them.

As the Nikkei reached our target zone yesterday [see: Update on NKD] the BoJ and GPIF were collectively sitting on losses of approximately $150 billion — about 3% of Japan’s GDP.

At yesterday’s low, NKD was testing the midline of a channel that goes all the way back to Aug 2010.  Each and every leg up has been driven by yen debasement or BoJ stock purchases.  Should it fail, it’s a long way down.That’s a big incentive to act, and to act quickly before things get even worse. The BoJ has a Monetary Policy Meeting next Tuesday and Wednesday, and another on October 30.  What will it take for them to pull the trigger?

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