DX reached a major Fibonacci level (white .886) on Nov 21, reversing just enough to hint at a more significant reaction to come.  But, the reaction was muted, and in fact DX repeatedly tagged and retreated from that level three more times before punching through late yesterday.

Adjusting for the contract change and moving the Fibonacci grid to the later peak in Jun 2010, we can see DX has today exceeded that peak and is closing in on the .382 (90.27) of the largest drop: from 121 in July 2001 to 71 in April 2008.

The weekly chart:

I’ve read all sorts of gobbly-gook over the past month regarding the market impact of a stronger dollar.  The bottom line is it makes the yen cheaper by comparison — meaning it fuels the yen carry trade, which means higher equity prices.  Note the USDJPY’s spike higher this morning.

For those who are new to the concept, the yen carry trade has been around for a while and is fairly straight-forward.  Borrow in yen at near 0%, invest in higher yielding instruments such as US treasury bills and pocket the difference. The only risk is that the yen would appreciate against the invested instrument’s currency, and one might face an FX loss when closing out the transaction.

When the BOJ announced they were going to cheapen the yen into oblivion, everything changed.  Investors suddenly didn’t have to worry about the currency risk; instead, it would be a currency gain.  They also found a more lucrative place to invest the proceeds of their borrowing: equities.

Since the BOJ also decided to prop up the Nikkei, investing the proceeds into Japanese equities became less risky.  And, when the Fed jumped on board with the Bernanke (and now, Yellen) put, US equities became more of a “sure thing.”

Today, we see tick-for-tick increases in US equities every time the yen dips (and USDJPY spikes.)  The correlation has been around 96% since the mid-October swoon.  The only times we see divergence between USDJPY and ES are when USDJPY dips precipitously.  But, then, there are other means with which to prop up ES, such as VIX.  USDJPY often “resets” after the US cash markets have closed (it’s done its job for the day by levering ES higher) lest it sail right off the top of the chart.

As long as the yen continues to cheapen, and central banks continue to intervene in equity markets (directly and indirectly) the yen carry trade will continue to work.

Abe has shown little interest in throttling back Japan’s QQE, even in the face of mounting criticism of the impact on households and businesses alike (cheaper yen = more expensive imports – especially food and fuel.)  In fact, the latest decision to expand QQE on October 31 is considered by many (including yours truly) as a desperate last gasp of policy which has clearly not managed to invigorate the Japanese economy.

From the US standpoint, a much stronger dollar conveys many benefits.  Imports (fuel, food, cars, Toyotas, etc.) are obviously cheaper, which makes keeping inflation under control a lot easier.  This, in turn, helps silence the “QE leads to runaway inflation” critics.  And, in a perverse twist, it gives the Fed ammunition for more QE down the road: “we’ve got to protect against deflation!”

The biggest prize of all?  Low inflation permits interest rates to stay exceptionally low without a lot of intervention.  Higher inflation would pressure interest rates higher — the last thing a country that’s $18 trillion (up from $10 trillion in 2008) in debt needs [note: more like $70 trillion in debt if one includes off-balance sheet obligations.]

Although the Fed intervenes in treasury markets to push interest rates around, it’s better and cheaper all around if the pressure for higher rates can be nipped in the bud.  A higher US dollar accomplishes that.  But, who does it hurt?

Obviously, US exporters are fighting an uphill battle.  The US trade deficit, which bottomed out at $35 billion per month in November 2013, topped $46 billion this past March (when DX was 13% cheaper) and is probably headed higher.

But, according to the World Bank, exports of goods and services comprise only 14% of US GDP.  The only countries with lower percentages are Afghanistan, Haiti, Nepal and a handful of African countries most people have never heard of.  So, we can’t very well expect TPTB to scuttle the very financial survival of the country for the sake of exporters.

One wild card in the whole equation is the euro — the largest component of the dollar index.  I fully expect that, should political pressure eventually throttle Abe’s efforts to cheapen the yen further, the ECB will be there with a new vehicle for the carry trade.

The interest rate differential between the eurozone and the US is already enough to fuel a healthy level of investment.  But, the euro is approaching a natural point of reversal at 1.2263.  Should it fail to reverse there, carry traders will sail into 2015 with the wind at their back.  But, a sharp reversal could unwind a lot of fat and happy’s.

The important questions:  what are the most likely scenarios for the yen, the euro and the dollar, and what are the implications for equity markets?

My favorite scenario involves the DX, EURUSD, the USDJPY, VIX and the 10-year notes all hitting specific upcoming targets at the same time.  Each of them would suggest a reversal for stocks; in an unrigged market, it would be a big one.  But, I don’t see the big reversal occurring just yet.

First, the levels:

• USDJPY — 120.05
• EURUSD — 1.22635
• DX — 90.272
• ZN — 124.095
• VIX — near or even below 10.28

Each of these represents a level which, if reached, could propel SPX to 2138 — the 1.618 extension of the drop from 1576 to 666 between 2007 and 2009.  In concert, the bullish impact of each would be multiplied — which is why I expect SPX to sail right up to and through 2138 in same fashion as it did at 1823 (the 1.272) about a year ago.

The timing, as I’ve discussed many times lately, will most likely center around the upcoming holidays.  But, if 2138 is reached prior to year’s end, I’ll look for a strong push higher and a backtest after 12/31.  I think it’s important to TPTB to log as high a number as possible in the year-end books.  Gaining 65 points in 20 remaining sessions means a lot of chop between now and then, so we could see some wild swings.

Should any of the indices max out prior to the grande finale, look for the others to carry the load.  There could easily be a succession of lifts from individual components rather than one concerted effort.

Once 2138 is topped, the game shifts into maintenance mode.  And, frankly, that’s too far down the rabbit hole for me to see at the present time.

GLTA.

 

 

 

SPX had every opportunity to sell off more yesterday, perhaps to the 20-day moving average (below, in white.)  But, as we expected, it was important for the index to close above the trend line connecting the previous tops.

As such, it was able to treat what was otherwise a bearish day as a bullish achievement: a successful backtest of that trend line.

What saved it?  USDJPY, of course.   As discussed last week, USDJPY and VIX will be the keys to maintaining prices through year’s end.  And, USDJPY took a big step closer to the .618 we’ve had our eyes on for several weeks.

It’s a little tricky, because DX has already tagged the major .886 Fib level 4 times — but without much of a reaction.  Dollar weakness = USDJPY weakness = stock weakness, and we can’t have that (at least until the end of the year.) So, look for the dollar and USDJPY to tread water, spiking when stocks need the boost and settling back down when the dust settles.

VIX backed off, but not all the way to the broken TL connecting recent bottoms as expected.  As a result, it’s in a chart pattern no man’s land — either reversing or taking a break from a continuing downtrend.

Unless the architects of this melt up have tired of achieving their goals day in and day out, we will see the index back down below that TL before too long.

And, SPX, because it needs to kill some time before tagging 2138, will probably take another swipe at the SMA20 (currently 2047ish) — especially as it’s gaining nearly 2 points per day.

UPDATE:  1:52 PM

SPX just reached the .618 retracement of its drop from 2075, coinciding with VIX’s tag of the broken trend line discussed above.  We should see a reversal here at 2065.97.  I’ll be watching to see whether SPX manages to remain in the rising purple channel it has regained.  VIX will probably drop back below the TL, but I don’t see it making a major move just yet — probably later in the month.  For now, it will most likely hold 13.

The wild card is our old friend USDJPY which, if it stays north of 118.59, will lever stocks higher regardless of VIX and Fib levels.  As of this moment, it’s creeping higher…

…thanks to the boost DX is getting from higher interest rates…

…which reversed nicely off our intermediate target yesterday.

 

Today might be an excellent day to fill up your tank, as crude light just nailed our Oct 14 target of 64.38 [see: Oct 14 Update on Oil.]

As we reiterated in our Nov 13 update, the .618 Fib level coincides with a long-term channel bottom dating back to 1999.  In other words — major support that should produce a major bounce.

Catalysts abound, but the most obvious is that US oil companies are being hit hard.  Earnings are obviously being impacted.  And, a major credit event is on deck if we don’t see a strong reversal.  In other words, TPTB need oil to strengthen.

Aside from that, take a look around MENA. It is, and has been, one headline away from a fear-driven spike in prices that could easily outweigh OPEC’s inaction last week.

Look for at least a $10 move back to the .500 Fib at 74.  The 10-day and 20-day moving averages are currently at 72 and 75.

Japan’s downgrade and falling eurozone PMI’s have conspired to undo the usual holiday session ramp.  Futures are off 7 points at present, after falling as much as 13.5 points overnight.

It looks like we’ll get a reaction at the 1.272 Fib after all.

It’ll be tougher for USDJPY to come to SPX’s rescue, as it has lost the white acceleration channel in place since Nov 5.  But, as we’ve observed many times in the past year, the folks moving those particular chess pieces don’t care much about broken patterns or implausible recoveries.

As we pointed out last week, the bigger issues for equities are the US dollar which, in a bearish development, tagged the important .886 Fib retracement of the drop from 90 in June 2010…

…and VIX, which broke down through support in place since early July.  After leaving 4 daily candles below that support, it opened back above the channel bottom this morning. Last, 10 year yields have nailed our 21.57 target — the .618 of the rise from 1.614% in May 2013. Taking all the above into account, I’m looking for USDJPY to hold 117.85 and VIX to be hammered back down to or below that channel line.

The end result should be that SPX closes back above 2055 (but, below the SMA5 at 2065 after setting a record last week) in order to back test the red, dashed TL connecting the Jul 24, Sep 4 and Sep 19 tops.

I’m not sure when, but somewhere along the line Thanksgiving went from a day of giving thanks to a celebration of gluttony, overspending, and watching 300-lb men play grab-ass.  I saw a recent report from the National Center on Family Homelessness, and it moved me to become more involved in addressing this pressing need in my local community.

Chances are there’s a need in your community, too.  I encourage all of our members and visitors (the kindest, most generous and best-looking in the blogosphere) to find a moment between the feast and the football to send much-needed funds to their local Salvation Army, Food Bank or other worthy organization.  Better yet, bag up those canned goods in the recesses of your pantry and head to the nearest shelter.

When you get back home — before you pull up a chair, enjoy the grab-ass and prepare for the misery of Black Friday shopping — take a minute to fire off an email to your elected officials to show a little freakin’ compassion and support legislation to restore funding to housing assistance programs.  Thanks to budget cuts, they currently help only 1 of every 4 families in need.

We’ll be back online on Monday, Dec 1.  Until then, I wish all of you a safe, happy and meaningful Thanksgiving.

 *  *  *  *  *

“Then the righteous will answer him, ‘Lord, when did we see you hungry and feed you, or thirsty and give you something to drink? ³⁸ When did we see you a stranger and invite you in, or needing clothes and clothe you? ³⁹ When did we see you sick or in prison and go to visit you?’ 

⁴⁰ “The King will reply, ‘Truly I tell you, whatever you did for one of the least of these brothers and sisters of mine, you did for me.’

Matthew 25:37-41

Mixed messages from yesterday’s “markets”…

USDJPY is flirting with losing the rising white channel after reaching the purple .886.

While DX definitely appears to have begun a reversal after reaching our .886 target.

And, 10-year treasury yields finally broke down from the triangle.

The outlier that conflict with all these bearish signals? VIX broke a rising trend line yesterday.

Unfortunately for bears, this is probably the only chart that matters at the moment.

continued for members… (more…)

Since DX reached our .886 target on Nov 21, stocks have been stuck, grinding out small daily gains.

SPX has come close to, but hasn’t yet reached, the 1.272 extension we’ve been watching.  Futures are currently up 3-4 points, meaning SPX has a shot at the Fib level on the opening.

The big question, of course, is whether or not it will matter.  SPX has paid very little attention to the Fib levels on the way up from 1820.  When there was any reaction at all, it never once even retraced to the next lower level.

USDJPY remains subdued, having reached our .886 Fib target, but with the possibility of another advance to the white .618 at 120.

This move, if it occurs, is likely being held in reserve for when it’s really needed — such as SPX pushing above a key Fib level.

More on this coming up later as we continue our look at the possibilities for the remainder of the year.

UPDATE:  11:25 AM

Mission accomplished on the 1.272 tag.  SPX reached 2074.21 before reversing, down about 9 1/2 points at present.  In an unrigged market, we might normally expect a reversal to the .786 or .886 after a Butterfly Pattern completes.

But, as we’ve discussed, there was no .786 reversal, so this isn’t technically a Butterfly.  And, this market is about as unrigged as a primary in North Korea.  Note the white arrows, each of which signifies a gap up on the open.

Instead, keep an eye on USDJPY and VIX, which have done all the heavy lifting and should continue to provide clues as to when a little more air will be let out.

 

 

 

Friday’s pop did, indeed, drop as expected.  The purple channel held for a bit, but eventually gave way to a near miss on closing the latest gap.

As we forecast Friday morning, TPTB left the 1.272 untagged in order to maintain a strong upside target.

The equivalent 1.272 for SPX is 2073.28.  As we discussed yesterday, TPTB have been running indices up near, but not quite to, natural reversal points — mitigating the odds of a reversal during market hours.  Keep an eye on ES, USDJPY and NKD as SPX approaches 2073.28.  If they start inching lower, that’s what you should expect to happen today.

The mild surprise was that the reversal took place on an OPEX trading day rather than over the weekend.

Central banks are picking up the pieces overnight, with USDJPY ramping and treasury futures monkey hammering.  Futures are showing up 7 points as of this writing, so SPX will get another shot at backtesting the broken purple channel (2065ish) this morning.

Note the strong BOJ support at 117.57, which will likely result in a tag of the white .618 at 120.05 in the next day or so.

Note the red 1.618’s proximity to the white .618 within the rising white channel beginning tomorrow.

Between two Fed surveys, central banker soundbites, VIX smashing, etc. 2073.28 is back on the table.  The question is “when?”

Over the past year or two, holidays have been saved for breaking through strong resistance.  It’s easier (meaning less expensive) to buy up a few thousand e-mini contracts than forcing the whole market higher during an active trading day.

So, what big prizes are out there that would be easier to bag in the next few days?  We’ll take a stab, including what might lie ahead for the rest of 2014.

First, note that while stock sell-offs continue to be mild to non-existent, volatility as measured by VIX has continued to rise since July.  The spike in mid-October was a reminder of the underlying bearishness out there.  But, the speed at which VIX plunged from 31 to under 13 was highly unusual.

The long-term chart shows just how unprecedented it was.  Let’s look at the past 20 years as a big channel, shown below in purple.  There have been three instances where VIX rose from the bottom to the middle of the channel: Dec 95-Jul 96, Feb-Aug 07, and Jun – Oct 2014.

In 1996, it took VIX 31 weeks to get to the channel midline.  It took it 7 1/2 years to fall back below the 25% channel line.  In 2007, it took 24 weeks for the rise, and 3 years for the fall.  This year, it took 15 weeks for the rise, and a mere 4 days for the fall.

There are two ways of looking at this aberration:

1. The rapid rise was very far off-base, and the fall was a return to rational thought.
2. The rise was very much justified, and the rapid fall was off-base.

Without devolving into a debate as to what constitutes “rational thought,” I think it’s fair to say that unprecedented moves in a so-called fear index are strong evidence of a change in the very dynamics of the market itself.

The fact that VIX is currently perched quite precariously on a TL connecting the past 5 lows dating back to Jul 3 should make any bear nervous.

continued for members… (more…)

In a move that surprised no one (except, apparently the market) China joined the party and ramped up its easing efforts by lowering interest rates.

The resulting effect on the futures, however, was to drive ES to the 1.272 Fib level — the upside target we identified a few weeks ago [see: Nov 4 update] and Fib reversal candidate.  So, as yesterday’s overnight futures action tagged an important support level (the SMA10), last night’s could have the opposite effect.

It’s important to note, however, that there was definitely no reversal at the .786 Fib level, meaning that nothing to date suggests completion of a legitimate Butterfly Pattern.  However, we have seen many, many 1.272 reversals along the way without a prior set up.  To review Butterfly Pattern rules, see THIS.

USDJPY rallied on the news, but is still well below the .886 we discussed at length yesterday and will probably continue to sell off near-term (for anyone who missed it, there’s trouble brewing between Abe and Kuroda.)  DX is rallying toward our 88.47 target — up to 88.295 at the moment.  However, it just completed a Bat Pattern at the .886 of its drop from 88.365 to 87.23 and might need a breather.

Bottom line, be cautious about chasing this rally.  If it weren’t OPEX, I’d say there’s high potential for a pop and drop.  As it is, any drop would probably have to wait until Sunday.

The equivalent 1.272 for SPX is 2073.28.  As we discussed yesterday, TPTB have been running indices up near, but not quite to, natural reversal points — mitigating the odds of a reversal during market hours.  Keep an eye on ES, USDJPY and NKD as SPX approaches 2073.28.  If they start inching lower, that’s what you should expect to happen today.

UPDATE:  9:39 AM

Getting close.  Will it make it, or will we see it peter out around 2071.65?  ES is notching lower, down 4.25 from it’s pre-opening highs.  If SPX does reverse short of 2073, look for a backtest of the broken purple channel for starters.

Anything more serious would mean closing the gap just created at 2050.75.  But, again, I expect this will wait till the after-hours Sunday or early Monday when only futures players can benefit.   Cash market investors have learned the hard way (like last night) what can happen when one leaves a short position on overnight.

Then again, there are about 8 such gaps in the wake of the rally from 1820 that the “market” seems to not be bothered with.  Why start worrying about appearances now?

 

NYA nearly completed a Bat Pattern a couple of days ago, coming within 6 points of the purple .886 at 10969.  While a reversal would seem to be a given, TPTB have been playing games lately.

First, they often bring an index just shy of a natural reversal point before easing off the gas.  By not quite touching the Fib level, it leaves open the possibility of another push higher.

Also, NYA has a history of playing along with whatever SPX and DJIA have going on — meaning it has no compunctions regarding the normal chart pattern rules.  We saw this in February, when the double top reversal couldn’t even reach the white .886 before screaming higher.

It happened again in August when the broken rising wedge was rejoined a few days later due to Fed chatter.  And, the only reversal of any note in the rally from 9886 was a very tiny one at the .786 — meaning, there is no harmonic argument for a Bat Pattern per se.

As a result, I’ll not consider the promise of a reversal impeachable until it actually happens.  NYA is back above the 1.00 Fib, and the white 1.272 is way up around 12,075.  Unless we get a USDJPY reversal in the 118-120 range, I’ll consider the target the purple 1.272 (11,440) around year end.

It can do so without even needing to retake the large, red rising wedge that broke down in September.