The futures are up over 30 points at present.  Why?  The headlines will point to China’s massive intervention, or this morning’s economic news, or maybe even speculation over the Fed’s upcoming action/inaction.

The reality is that the BoJ decided that things were getting out of hand, and they decided to bring USDJPY back to the magic salvation of the .618 Fib at 120.11.Who in their right mind could have looked at Friday’s falling red channel and felt bullish about USDJPY’s prospects?  As we wrote on Friday:

Stay short over the weekend and risk a big pop higher over the 3-day weekend.  Go long and risk a 55-pt gap down.

When equities, bonds and oil are all taking their cues from the whims of the BoJ and their notion of when “enough is enough,” well… that isn’t really a market anymore, is it?

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In our last major update on March 13, I noted that DX was approaching the 61.8% retracement of the drop from 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 forming a slightly falling sideways pattern that would qualify as a flag pattern if it would zip up and tag the potential upper bound.

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VIX finally broke out of its 8-month old flag pattern, and did it in style.  In the process, it did a darn good impersonation of the 1997-2007 cycle.

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The volatility we projected in our last EURUSD update has been muted by a continuing lack of correlation with other markets.  The ECB was so long in actually instituting its easing that the markets were able to significantly front-run it, rendering it fairly useless as a carry trade vehicle.

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Not really big, more like medium range. Three weeks tops.  With lots of talking heads embracing the idea of another leg down, let’s evaluate the potential.

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The past few days have been all about whether the Fed, ECB and BoJ will or won’t step in and calm the markets.  With a better than expected unemployment rate out this morning, the Fed will be under increasing pressure to raise rates, if even a little.

Needless to say, this isn’t helping stocks much.  The futures are currently off 25 points, but the real damage was done yesterday after Japan opened and USDJPY retreated once again from the safety of 120.11.

It’s pretty clear that stocks have protested each drop through the yellow Fib at 120.11, and each trip above has been rewarded.  While the BoJ wishes it weren’t in this predicament, it is.  And, of course, it’s not by accident.

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Note: I’ve posted August’s results (+32.44%), available HERE.  I’ve also let the membership promotion run through today’s trading session for anyone who would still like to take advantage.  It’s a 39% savings off the regular annual price (which increases this afternoon) and a 55% savings off a monthly subscription.  Best of all, it locks in your rate for as long as you’re a member.  For more details and to sign up, CLICK HERE.

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Draghi’s comments could be summarized as “all sizzle, no steak.”  They were enough to momentarily boost ES over 20 points — now back down to a mere 9-pt gain.  Importantly, the boost gave USDJPY a chance to reset.  It dropped nearly half a percent with little effect on stocks due to the offsetting ECB effect (and, the fact that the “markets” haven’t yet opened.)This was beneficial on two counts.  First, it gives “markets” the opportunity to experience the euphoria of topping 120.11 all over again.  Second, it allows ES to develop a nice little right shoulder in yet another IH&S.  Our decision to go long at 1904.11 on Tuesday is looking better and better.

For all you daredevils out there, here’s your opening!  Long at 1904.11.  And, if you do, good luck sleeping tonight!

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August was one of those months I’ve been dreaming about since last March.  Instead of the drip, drip, drip of 5-point, algorithm-driven melt-ups, we had some good old-fashioned volatility.  Stocks were actually permitted to decline.

Those few hedge funds still around which have a short bias or are volatility plays also reported great numbers.  Good on them.  Except for a couple of very brief downdrafts in October and December, they’ve been sucking on fumes.  The vast majority of funds, which gave up hedging a long time ago as too expensive and altogether unnecessary, got a pointed reminder of why the word “hedge” appears in their prospectuses.

Our August numbers were much better than average.  Since calling a top on May 20 [see: The Last Big Butterfly] we’ve anticipated a substantial decline which was forecast by an analog I developed in late March [see: A New Analog.]  Bottom line, it called for a good scare that would prompt BoJ easing.

Ideally, it’ll be preceded by a sharp downturn which is just scary enough to convince The Powers That Be that another expansion of Japanese QQE is vital to the global economy.

We’re waiting for the BoJ’s reaction, but I’d say this decline was reasonably scary.

The Nikkei 225 fell over 18% in less than a week. And, USDJPY had its biggest single-day decline since May 6, 2010 which, in turn, prompted the biggest single-day SPX decline since May 6, 2010.  Some readers may recall that 2010 scare (and the hints regarding QE2 that were dropped at Jackson Hole shortly thereafter.)

This latest decline, and all the volatility — both preceding and following it — was favorable to our style of market analysis, which focuses on changes in direction as forecast by chart patterns, harmonic patterns and, of course, analogs.  Unfortunately, the volatility led to what is, in my opinion, an excessive number of intra-day calls – averaging almost 5/day.

It’s always a struggle to find a balance between performance and level of activity.  The more hectic a session, the more head fakes and reversals – which leads to more intra-day calls.  August was an extremely hectic month, with six sessions involving rare 50-point ranges and many calls which were reversed within minutes after being posted.

Buy-and-hold and swing trading members, who aren’t as focused on intra-day trading, are reminded to check the Current Forecast page for my view on the next few weeks.

By the way, it has become quite common for whatever trend is in place at the end of each session to be reversed the following day — especially when the trend is down.  It’s not at all unusual for SPX to plunge below support at the closing bell, only to gap up by 10-20 points the following morning.  It happened just this morning (Sep 2.)

So, while I usually offer an opinion as to what I expect the following day, these opinions are wrong nearly as often as they’re right.  It’s a lovely little feature of the predatory algorithmic trading that has prevailed since late 2011.  I urge members not to put too much stock into these end-of day forecasts, and to trade on them only when they can hedge or at least monitor their position overnight.

One last note: a member pointed out last night that I still hadn’t changed the membership pricing back to the normal rates following our recent promotion.  Unfortunately, I’ve been working 15-18 hour days lately and have just been too busy.  I’ll change it back following today’s close, giving anyone who’s interested one last chance at a great deal.  For more info and to sign up, CLICK HERE.

August’s results raised the median monthly figure from 13.76% to 16.08%. The monthly results for 2015 to date are as follows.

A reminder, these results reflect the performance of a theoretical portfolio where the S&P 500 index is bought or shorted based on signals generated by my research.  Your mileage will vary.  No leverage is assumed; the portfolio is assumed to be 100% long, 100% short or 100% cash.

Prices listed reflect the index at the time that tops/bottoms are called and are believed, but not guaranteed, to be accurate. There is typically a 2-3 minute lag in the posting of each call.  Dividends, transaction costs and the cost of any hedging are not included.  And, past results are not necessarily indicative of future results.  See Disclosures and Use Agreement for important information.

One of the biggest challenges in charting the day after a big plunge is whether the subsequent rebound is the start of a new trend or a relief rally before the real ugliness sets in.  With the futures currently up around 20 points, our decision to go long at 1904.11 yesterday afternoon looks like the right one.

For all you daredevils out there, here’s your opening!  Long at 1904.11.  And, if you do, good luck sleeping tonight!

Will we still feel the same after today’s action?

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I’ve written ad nauseam about the importance of the yen carry trade to the stock “market” since October 2011.  Put simply, a rising USDJPY (weaker yen) lifts stocks.  A falling USDJPY causes corrections.  It’s really as simple as that, though there are plenty of nuances.

One of the most important nuances is the price of oil which, to a country like Japan that imports most of its energy needs (even before it shut down its nuclear plants), is driven higher by a weaker yen.

Higher oil prices cause undesirable inflation, which further pressures struggling Japanese taxpayers – both corporations and individuals.

One of my more outlandish 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 chart below clearly shows that oil broke trend line support at exactly the same time (August 19, 2014 – the white arrows) that the USDJPY broke out from an 8-month old triangle.

As everyone knows, correlation isn’t causation.  But, suppose the BoJ were hesitant to visit more inflation on their citizenry.  Wouldn’t the promise of a 2/3 drop in the price of oil help grease the skids?

Keen market observer Eric Hunsader of Nanex has frequently written about the spoofing going on in the oil market.  Spoofing involves placing and quickly cancelling a barrage of orders — usually within a fraction of a second — in order to convince market participants that a certain depth of buy/sell orders exists.

One instance on January 9 [reposted on Zerohedge] detailed 69 100-lot orders spoofed during a 45-minute period.  Suffice it to say, it’s no more difficult to manipulate the oil market than it is the stock market.

When USDJPY reached the .618 Fib at 120.11 (its most serious overhead resistance) in December, it faltered.  Per the rules of Harmonics, a reversal would have been normal after recovering 61.8% of its drop from 147 in 1998 to 75 in 2011.On Dec 5, the day that USDJPY reached 120.11, SPX began a 107-point (5%) drop.  The drop bottomed out on Dec 15, which not so coincidentally is the day that USDJPY reversed and headed back to 120.11.  Guess what else happened?

Gold stars for everyone who said “oil dropped again.”  In fact, it dropped another 18% over the next 3 months.  On the day that we called the bottom in oil [see: Update on Oil Mar 17, 2015] USDJPY committed the faux pas of dipping back below 120.11, and failing to recover until mid-May.

Stocks didn’t much care for this irresponsible behavior, so they did the same – bouncing sideways until USDJPY topped 120.11 again, in a halfhearted and quick-to-fail bounce that couldn’t overcome the huge Butterfly Pattern [see: The Last Big Butterfly] completion at 2138.04.

SPX maxed out at 2134.72 and it’s been all downhill since.  As the chart above shows, things have gotten especially ugly each time USDJPY dipped below 120.11 (as well as key moving averages.)  Today’s cratering was the latest and greatest example.

But, the S&P 500 isn’t what keeps Haruhiko Kuroda awake at night.  It’s the $666 billion equity portfolio that’s concentrated in Japanese stocks that, between them, the BoJ and GPIF own.  It’s about 14% of Japan’s GDP.  So, when the Nikkei was off by 18% ($120 billion) from its highs last Monday, Haruhiko was staring down the barrel of a 2.4% GDP haircut. [see: Japan’s Equity Trap.]

Odds are, the prospect of that kind of loss got his attention — just like the 31% increase in oil prices over the past week did.  Energy imports were about 55% (about $70 billion) of Japan’s trade deficit over the past year.  That 31% increase, were it to hold, would equate to roughly $21 billion — an ongoing 1/2% hit to GDP.  Another tax, as it were.Clearly, Abe and Kuroda are faced with some tough choices:

• devalue the yen further, keeping the yen carry trade alive and saving their massive stock portfolio (not to mention their jobs)… but, at the cost of much higher energy expenses for businesses and consumers
• let the yen appreciate, and thereby keeping energy costs affordable…but, at the cost of massive losses in the markets

Luckily for them, they have friends like the Fed, the ECB and the BOE who are more than willing to help.  Suppose, for instance, the other central banks came to them with a third option?

Suppose they offered to help keep oil affordable…as long as Japan did its part to keep the yen carry trade alive?

Sure, Mrs. Watanabe will pay more for fresh food, but at least her stock portfolio won’t go all Fukushima on her.  And, government employees might even be able to collect a little something from the GPIF come retirement time.

It’s not a permanent solution, as Japan is technically bankrupt and this only postpones the inevitable.  But, that’s what central bankers do best, right?   If Japan can’t do the right thing, well…we might just have a few more days like today.  And, that would be a shame…

In my opinion, it’s an offer Japan can’t refuse.