Central bankers everywhere are publicly conceding that their creations (aka “markets”) are overpriced.  Yellen herself has uttered the “B word” on more than one occasion.

So, it is with great curiosity that we approach another FOMC Jamboree that will either further inflate the myriad bubbles or seek to let just a little air out — ideally without popping them.

After nailing our downside target on Monday, SPX rebounded to slightly higher than our bounce target.  Will it break out again?  It all depends on Ms. Yellen & Co. and whether they can locate their long lost backbone.

Remember, at least 75% of the time, FOMC announcements/press conferences have led to a frenzy of algo activity that drives prices higher into the close.  It’s part of the “FOMC has got our back” meme that investors have come to accept/expect.

A quick look at the S&P eminis this morning.  The threat of a breakout is very real, but we have a pretty clear line in the sand with which to identify it.

My preference is to stay on the sidelines on days like today.  The algo-driven rallies don’t always last, and there are often sharp spikes in either direction.

UPDATE:  9:35 AM

A short-term shorting opportunity here at 2103.64 as SPX just nudged up against the SMA50 and still no breakout on ES.  Tight stops are advised.

Updated targets and currency charts coming up in a few.

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On June 10, in Did Kuroda Just Kill the Bull Market? we highlighted Bank of Japan head Haruhiko Kuroda’s surprising announcement to the Japanese parliament:

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come.”

After a massive (sarc) 3% slide in the Nikkei in the ensuing week, Kuroda has had second thoughts.  Last night:

““I didn’t say that I’m not seeking a weak yen in nominal terms, nor did I say that it’s unlikely that the yen will fall further.”

Say what???  He further “clarifies:”

“I didn’t mean to evaluate the current nominal exchange rate or forecast the outlook.  I just gave a theoretical explanation in response to a question about real effective rates.”

The “question” isn’t on the record — at least that I can find.  And, though I have no video to support this, I’m pretty sure that last comment was accompanied by a well-timed wink.  Consider the Nikkei 225, of which the BOJ has a sizable and growing position.

The yen’s last major deflating — reflected as a rise in USDJPY — came amidst the October 2014 market scare.  The S&P 500 had fallen 9.8% in less than a month (the Nikkei 12.3%.) The Fed and the BOJ swung into action.

Fed President Bullard hinted at QE4, and the BoJ immediately monkey-hammered the yen — followed a few days later by a massive increase in QE and direct stock buying by the BOJ itself and the government pension plan. The impact was dramatic.

NKD spiked 21% in just two weeks (SPX by 11%.)  But, it wasn’t quite enough for the NKD to top its nosebleed 2007 highs.

Why not?  On Dec 4, the USDJPY reached a major Fibonacci level: the 61.8% retracement of the drop from 147.65 in 1998 to its 2011 lows of 75.56.  Big investors who depend on the lucrative yen carry trade for huge profits [see: The Yen Carry Trade Explained] reined in their equity exposure — as is illustrated below.

The .618 Fib is shown as the dotted yellow line (at 120.11), and the daily SPX values are plotted as a thin purple line on the chart below.  Note the wild swings in SPX that began right after USDJPY reached 120.11.

Every time stocks started selling off, the USDJPY would magically make a bee line for 120.11 — typically landing just above it in order to reassure carry trade investors that all was well (producing a series of new highs for SPX.)

In late May, when SPX completed the last major Fibonacci Pattern on the its chart [see: The Last Big Butterfly] and was threatened with a major reversal, what happened?  USDJPY suddenly shot from below 120.11 to 125.84.

On the other side of the Pacific, the manipulation was even more obvious.  NKD approached its 2007 highs in December exactly as USDJPY reached the .618 Fib at 120.11.  They both peaked on Dec 5.

Every time since then that NKD needed a boost, USDJPY would shoot up past 120.11 — if only temporarily.  The objective?  Maintain the rising red acceleration channel that offers an opportunity to break out of the rising white channel from 2009.

Note that Kuroda’s initial comment talking up the yen (down the USDJPY) came as NKD had reached the top of its white channel and the midline of the red — natural reversal points in chart pattern theory.

It’s common knowledge that many in Japan are not happy with the yen’s demise.  In a country where almost everything is imported, it places a real burden on consumers and manufacturers alike.  Despite Kuroda and Abe’s insistence to the contrary, inflation is already a problem.

Oil, which was deliberately crashed for a plethora of reasons [see: Those Wacky Central Bankers], has rebounded strongly — up 37% in yen terms since we called the bottom on March 17 [see: Update on Oil.]

Aluminum has soared in yen terms, up 64% since its 2012 lows and easily outpacing the growth in sales a cheaper yen promised to deliver the auto manufacturers.

On the consumer side, fresh food prices are hitting new highs.

And, meat prices are through the roof.

In short, a plunging yen places an very real and onerous tax on the very consumers and businesses who are already being bled dry by rising taxes.  Kuroda knows this, and started talking up the yen on June 8.  The Nikkei 225 immediately plunged 4%.

The USDJPY found channel support (red mid-line), which allowed NKD (thin purple line above) to recover (a Fibonacci) .886 of its losses.  But, its failure to retake the Jun 9 lows and subsequent failure of a short-term trend line has left NKD vulnerable to additional losses.

Enter Kuroda again, helping us better understand his comments of last week.  NKD’s decline was arrested, just in time to preserve the rising red channel discussed above.

SPX is up about 8 points and, in fact, just nailed our secondary bounce target posted in yesterday’s members section.

SPX just tagged our next downside target, reaching 2074.26…  An ideal bounce spot would be back to the SMA100 at 2088 or even the gray midline around 2092.

With the “markets” subject not only to made up news stories (what’s the latest tweet re Greece?) but the constant manipulations unleashed by politicians and central bankers, is there much value in economic analysis or charting anymore?

Clearly, Japan is in deep, deep trouble.  They’ve gone all in on the yen carry trade and are, effectively, holding a very large heavily margined position in stocks and bonds that would absolutely crater were the yen to strengthen significantly.

Caught in between the rock of protecting their balance sheet and the hard place of screwing over the Japanese people, they’re apparently going with the rock.  When push comes to shove, Kuroda explains, the yen can absolutely go even lower.

As long as it does, the yen carry trade needn’t unwind — much like in 1995-2000 and 2003-2007.  If it should reverse, however, run — don’t walk — to the nearest exit.

We won’t know until it happens how effectively central bankers can stave off a true market crash once it gets started.  We’ve had several warning signs already — including the Big Butterfly Pattern completion on May 20.  I for one, would rather remain aware of the danger zones ahead instead of cruising blithely along, assuming they won’t bite me as long as I ignore them.

Coming up: today’s market update and forecast.

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It’s a small dose, to be sure, but this morning’s Empire Fed Survey is a reminder that not all is well in the land of ever-increasing stock prices.It’s adding to continuing Greece concerns and an unusual trifecta of faltering algo drivers.  CL is in danger of losing the rising channel bottom (finally catching up to reality?)USDJPY, while bouncing, is still under the influence of last week’s Kuroda buzz kill [see: Did Kuroda Just Kill the Bull Market?] after reaching our 125.72 target last week.And, EURUSD is going the wrong way for all the right reasons (for a change.)

As for SPX, last week’s downside targets remain firmly in place, with the initial plunge certain to break the SMA100 (2087.96) yet again.

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“If you give a mouse a cookie, he’s going to ask for a glass of milk. When you give him the milk, he’ll probably ask you for a straw. When he’s finished, he’ll ask you for a napkin. Then he’ll want to look in a mirror to make sure he doesn’t have a milk mustache.”

And, the familiar children’s classic goes on from there – one amusing unintended consequence after another.

One parallel in the investment world is oil.  If you ramp up oil futures in order to convince investors that demand and profitability are coming back, you run the risk of those higher prices showing up in some unfortunate places — such as PPI.

And, if PPI rises, say, the most in three years, investors will come to fear higher interest rates from central banks.  And, if they fear higher interest rates, they’ll start dumping bonds — which are bid up to impossibly high levels by those same central banks. If investors start dumping bonds, you will get those higher interest rates of which they were afraid.

If governments can’t sell bonds at 0-2%, then their budgets — which have been balanced on the back of zero interest rate policy — go belly up.  And, if government budgets go belly up, we might just have a financial crisis that spirals out of control.

Wouldn’t that be an amusing unintended consequence?

Crude light is up 37% since its March lows — largely to mask the fact that the all-important yen carry trade is faltering.

The yen carry trade is faltering because the yen basically squatted at 120 for over 5 months.  USDJPY finally broke out at the end of May, only to be talked back down two days ago by Kuroda himself [see: Did Kuroda Just Kill the Bull Market?]

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come.”

In a “market” that has thrived on zero interest rates, investor complacency and central bank manipulation, we have to wonder how much longer the free lunch can last?

Yesterday, SPX slightly overshot our upside target (2112, later revised to 2115 in the member section.)  Our downside targets remain in place.  But, watch out for those Greece rumors, which can send prices soaring or plunging regardless of their veracity.

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USDJPY bounced at the red midline as we discussed yesterday…

…leaving CL in limbo, but with room to settle back……and SPX’s upside targets posted in yesterday’s members section intact.  It appears we’re going to reach the first one in the opening push.

UPDATE:  9:35 AM

SPX just tagged our 2112 target.  Updated forecast in a moment.

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In January’s major update on VIX, we noted it as approaching support at 15 and was following a fairly bullish path higher (bearish for stocks.)  Almost as an afterthought, we included the much lower red target which represented the “what if we’re wrong?” scenario.

This chart, of course, was prior to the discovery of our new analog in March [see: A New Analog] which completely changed our outlook.  As fate (more accurately, central bankers and their accomplices) would have it, VIX blew through the support at 15 and nailed the red target instead.

It has since tagged our even lower target set in May (though a little late) and has fleshed out the lower half of the falling white channel we first suggested in March.

Yesterday, it tagged the midline of this falling channel.  But, today, it fell back and tagged the .236 line.  In a normal, unrigged market, this would mean a bounce higher (to the .786 line — white dot) and a continuation of stocks’ slump — especially in the wake of the recent Big Butterfly Pattern completion and today’s BoJ comments on the yen [see: Did Kuroda Just Kill the Bull Market?]

But, seeing as how this one is anything but unrigged [great example just today], we take this kind of move with a cautious grain of salt.

Stay tuned.

In a stunning example of just how rigged “markets” are, the ECB just announced [full text below] the biggest increase in Greece’s credit line in months.  The kicker?  It came at precisely the moment when SPX most needed a boost to break out of a falling channel and top its 50-day moving average.

This is what happened — shown on a 1-min chart to make it perfectly clear:

The daily chart we posted yesterday shows how important 2100 was from a technical standpoint.  It represented both the top of a pretty well-formed falling channel and the 50-day moving average.

A reversal here, and the next stop is lower — possibly a lot lower according to the charts.  A reversal would have been quite detrimental to the bullish meme that folks like Bloomberg are paid quite well to spread.

The risk was elevated because, earlier today, BoJ’s Kuroda announced to the Japanese parliament that he saw no reason for the yen to fall any further.

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come,” Kuroda said in parliament Wednesday.

So, it was incredibly important to prove to the investing world that the yen carry trade isn’t that important to rising stock prices — which, of course, is a total crock. [see HERE]

Is it possible that the timing of the announcement was a coincidence, and had nothing to do with the “market’s” need for a breakout?  In a rainbow-farting unicorn world, I suppose.  But, if you’ve taken the red pill, you know better.

Any doubt should be removed by the release of a second article a few minutes later (might as well go for the 10-day moving average, too) that Germany was to offer Greece a deal on aid as long as they really, really promise to do something this time.  Bloomberg, quoting the always reliable “one person”:

To convince creditors that Greece is serious, Tsipras would have to take tangible action, for instance introducing reform legislation in the Greek parliament, one person said. If Greek officials move quickly, funds could be released in early July, the person said.

Updated chart:

Sometimes it really sucks to be right.  From this morning’s members’ section, shortly before the breakout:

EURUSD is the one driver that seems to have plenty of upside potential.  Of course, it’s swimming upstream given the steady stream of negative news regarding the Greece negotiations.

It goes without saying, but a very positive development (or rumor thereof) is a serious threat to any short position (trade safely, use stops.)

 *  *  *  *  *

The full text of both Bloomberg articles (and, shame on you, Bloomberg, for being such a tool):

ECB Said to Raise Greece’s ELA Ceiling by Most Since February

 

Last night, while the S&P e-minis were ramping on the basis of nothing whatsoever, Bank of Japan head Haruhiko Kuroda spoke to the Japanese Parliament:

“The yen is unlikely to weaken further in real effective terms if you think with common sense, given how far it has come,” Kuroda said in parliament Wednesday.

While the FX world argues his intentions (and the uncharacteristic injection of “common sense” into the equation!) USDJPY is tanking — this, after reaching our upside target last Friday.While he has no intention of paring back QQE at this time, and still insists there are no asset bubbles in Japan, the yen carry trade has been the single biggest driver of stock prices since late 2011 [read more HERE.]

Look for a sharp rally in oil and the euro in order to mitigate the effects.  But, if the yen carry trade unwinds, the “markets” are pretty much screwed.

This changes our upside target for this bounce.

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Yesterday, SPX tagged our next downside target [added on May 29] and even put in the overshoot we discussed.

From Friday’s post Bad Good News:

Assuming (as we do) that USDJPY runs out of steam at 125.72 and CL bounces back at 57.09 or so and TNX tops out at 24.38, SPX should have little trouble tagging our next downside target at 2082ish, with an overshoot a distinct possibility.

USDJPY is clinging to the rising TL from May 27, but is showing signs of weakness after reaching our upside target last Friday.

This puts the onus on CL, which is…ahem…rising to the challenge.

As long as CL and USDJPY mind their manners, I see no reason to change yesterday’s forecast.

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Friday saw SPX come within 2 points of our next downside target [added on May 29] before the algos kicked in.  From Friday’s post Bad Good News:

Assuming (as we do) that USDJPY runs out of steam at 125.72 and CL bounces back at 57.09 or so and TNX tops out at 24.38, SPX should have little trouble tagging our next downside target at 2082ish, with an overshoot a distinct possibility.

USDJPY ran out of steam at 125.67, CL bottomed at 56.83, and TNX topped out at 24.24.  So, everything went pretty much according to play, except for the timing and strength of CL’s bounce: 4.2% in a day!

That’s the trouble with market manipulation: some participants either don’t get the memo, or don’t feel like waiting for the signal.

It’s selling off this morning, leaving us to wonder whether the downside is really over for now.

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Hard to say, as the eminis did reach their .618 retrace from earlier in the month.

And, DX is selling off this morning — even as CL is showing weakness.But, USDJPY is finally reversing at the 1.618 — our next upside target.  So, my best guess is that TPTB would like a more solid touch of the rising channels/TLs on SPX, and that we’ll see SPX bag 2083 before it’s all over.

UPDATE: 10:00 AM

Quick update of the daily charts.  First, note that the SMA10 (red) has crossed the SMA20 (white) — almost always at least a short-term bearish development.  But, it’s happened many times before and still, the SMA100 (yellow) provided strong support.

Now that the SMA200 (thick red line) has climbed above the March lows, I think there’s a decent chance of SPX reaching it.  As we’ve noted before, a reversal at the red .786 would set up a drop to the red 1.272 at 2049.76 — which is exactly where the SMA200 should be in the next week or so.  It also happens to coincide with the peach .886.

So, we’ll make 2050 our next major downside target for now.  Note, from the bigger chart, that there is much more potential downside should support not hold.

To get to 2050 would require a break in TL/channel support.  So, I hesitate to consider it “likely.”  For now, we’ll just call it a likely target should the support at the SMA100 not hold.  Here’s the updated daily chart:

I still believe the USDJPY will backtest the yellow .618 at 120.11 about the time its SMA200 reaches that price level. For now, it appears to intersect in late July.  Our analog calls for a tag on Jul 29 — hence the yellow target.

For USDJPY to fall that far would surely ding stocks pretty much.  So, a drop to SPX 2050 might not be all that farfetched.  I’ll try to get some updated charts for our analog posted this afternoon.

Note: having seen countless instances of full recoveries and new highs after the SMA100 tag, I’d also be very open to the idea of SPX hanging on to the purple channel whose bottom it just tagged.

While I’d like to think the SMA200 could get tagged, TPTB have proven quite adept at pushing SPX up through resistance.  With a Greece “fix”, another BOJ expansion, etc. anything is possible.

UPDATE:  1:15 PM

SPX has tagged the SMA100, reaching 2081.92.  If our mid-term forecast is correct, we should see a strong rebound very soon.  Initial target 2091 with a secondary target of 2100.  Certainly worth a shot…

UPDATE:  2:39 PM

The memo:  http://www.wsj.com/articles/greece-creditors-consider-extending-eurozone-bailout-until-march-1433788055

BRUSSELS—Greece’s international creditors have suggested extending the country’s bailout program until the end of March 2016, but disagreements over the conditions attached to the continued support and what would happen afterward risk undermining that plan, three people familiar with the negotiations said Monday.

The eurozone’s portion of Greece’s €245 billion ($272 billion) rescue program runs out at the end of June, which has raised questions over how Athens will pay its debt beyond this month and remain in Europe’s currency union. To ensure that Greece doesn’t run out of money until the end of March, it would get access to some €10.9 billion that had been set aside under its old bailout for recapitalizing weak banks, the people said.

“What we offered would mean that Greece is fully financed until March 2016,” said one person, referring to a meeting last week between European Commission President Jean-Claude Juncker, Greek Prime Minister Alexis Tsipras and Jeroen Dijsselbloem, the Dutch finance minister who represents eurozone governments in the talks.

Related

• Obama Calls for Compromise on Greece
• Bank of France’s Noyer: Talks at ‘Extremely Urgent’ Stage
• Europe File: Greece and Creditors Head for the Brink

At that meeting, Messrs. Juncker and Dijsselbloem offered the extension and the extra funding in return for Greece implementing policy overhauls as well as pension cuts and tax increases, the people said. But Mr. Tsipras rejected those terms as “unacceptable.”

Failure to reach a deal on the conditions attached to new aid now risks undermining the deal offered at Wednesday’s meeting, one of the people said. “Every additional day of capital outflows [from Greece’s banks] means less money can be taken from the [bank recapitalization fund and used to repay debt] and instead has to be used to stabilize the banks,” this person said.

Another factor holding up a deal is what would happen after March. One of the people said that Greece insists it doesn’t want a third bailout program—which many creditor representatives believe is necessary—and doesn’t want to follow spending conditions laid out by its creditors beyond March.