Not much consolidation after yesterday’s Hilsen-rally. So, I’d look for a backtest of the SMA10/20’s on any pullback. Otherwise, SPX never reached the .786 or .886 yeaterday. Those would have to be the immediate upside targets.
The SMA50 looks miles away, now. But, as the talking heads have pointed out, anything can happen on FOMC day.
UPDATE: 12:45 PM
We’ve seen general weakness following the early session ramp job. Here’s a quick look at support and resistance.
continued for members...
Good channel resistance here… would make a nice turning point if the SMA50 is going to be tested.
UPDATE: 5:30 PM
Coulda, shoulda, woulda… Hilsenrath says the Fed will keep the juices flowing, and that’s all the “market” needed to hear. I have no trouble believing it, as the end of QE is enough of a risk for the Fed without piling out higher rates in the near term.
Note yields sure look like they’ve run out of steam. And, most of the time, plunge in yields = lower stock prices.
There’s no Fibonacci argument for lower prices in SPX at the present time; but, the fact that the USD remains stuck at the inflection point we discussed last week suggests this corrective move down from 2011 isn’t yet complete.
Recall that the .886 Fib is a larger scale reversal point that coincides with a channel midline that has been quite effective in the past.
The correlation between SPX and DX has oscillated significantly over the years.
But, given that much of the equity strength since Oct 2011 has been based on USDJPY strength (yen weakness), I think this bears watching.
SPX has two moving averages that happen to coincide with significant Fib levels. I tend to think the current corrective movement will seek one of these targets.
continued for members… (more…)
It’s a battle of the channels…
If the red channel holds, we should revisit the yellow neckline. As always, keep an eye on USDJPY. It is extremely overbought.
But, the guys writing the script are stuck. Any move lower will tank stocks. The market is addicted to an ever cheaper yen. Withdrawal won’t be pretty.
And, note how prices have returned to close at the 1.272 Fib every day since first broaching it. Clearly TPTB realize it’s out of control.
The BOJ is royally screwed. Japan, which is already monetizing its own debt courtesy of the BOJ (most recently, at negative interest rates) would collapse under higher interest rates. Rates must stay low, which will continue to put pressure on the yen — especially relative to the USD as the Fed tightens. But, consumers, stretched to the limit with yet another tax hike on the way, simply can’t handle the higher food and energy costs which would accompany a cheaper yen.
Frankly, I don’t see a way out — which usually means they’ll do something even more irresponsible — like ballooning the BOJ’s balance sheet even more in order to keep the house of cards standing just a little longer and keeping USDJPY in a holding pattern as long as possible.
What will happen to the yen carry trade? I can’t say. With EURUSD’s continuing collapse, perhaps the hedgies will shift gears. But, as we noted a couple of days, ago, the dollar itself could be ready for a correction. It should be an interesting next few weeks.
UPDATE: 12:15 PM
Looks like SkyNet has taken over at this point, with USDJPY and VIX taking turns pushing stocks around. Things could get interesting if that rising wedge in USDJPY were to break down. But, it’s more likely to happen after-hours.
Volume has gone bye-bye; so I think I’ll sit the rest of this one out. Chances are we’ll get a big move over the weekend, but it’s anyone’s guess which direction as we’ve discussed in the past few days of big picture charts.
UPDATE: 1:45 PM
Spoke too soon! USDJPY played along…
…and, helped ES reach the H&S neckline as we originally discussed this morning. There’s more downside potential, of course, but it looks like USDJPY is done for now. While it’s always nice to be right, I hate the fact that the algos were completely responsible for the move. Will we ever get our market back from the machines?
Have a great weekend, everyone.
Another disappointing jobs report — which last week led to a market rally as it was interpreted as a hindrance to Fed rate hikes. Trade safely.
The dollar chart has my attention today, as DX has completed a Bat Pattern at the key channel midline line. It has failed to advance past the midline five previous times. So, it’s safe to characterize it as an important inflection point. Should it fail again, it has huge implications for USDJPY and EURUSD as well.
The longer-term view:
Yesterday’s USDJPY-driven ramp in the last several hours that took prices back above the H&S neckline puts a dent in our downside case.
Though, I believe there’s still a good argument. Looking at the futures, we can see a well-formed channel, the top of which we will likely test around 10am EST. If the usual morning pump runs its course by then, look for a dump as indicated.
continued for members…
USDJPY ramp continued into the night, tagging the daily 1.272 and completing a Butterfly Pattern. As we’ve often warned, a decline in USDJPY could end the dollar-yen carry trade momentum stocks have enjoyed since Abe first began trashing the yen.
There have been two very interesting developments in the past 24 hours. First, The BOJ just bought 3 month bills at a negative yield — in essence directly funding the Japanese treasury. Second, Japanese finance ministers have started talking up the yen, stating that a lower exchange rate with the dollar “would not be desirable.” Is the carry trade over, or are mom and dad merely squabbling?
Note that each USDJPY reversal beginning with Jan 2 (Point A) caused sizable sell-offs in stocks. From A to B corresponded to 104 points; from C to D was 77. And, the mere thought that the party was over at Point E touched off the August swoon in stocks. What if the party really were over?
After nailing the first two downside targets (D1 and D2), I’m more than a little nervous offering up a third. But, here goes.
continued for members…
Continuing the theme began yesterday of big picture items, we’ll take a quick look at interest rates. The 10-yr note was another of those bearish charts from earlier in the year.
While the talking heads insist that lower rates would be a good thing for stocks, the chart shows otherwise. Reversals from tags of a falling white channel as well as the yellow dashed trend line led to stock sell-offs, as the chart from March clearly shows [see: Eye Candy for Bears]:
As we anticipated, rates did, in fact, decline from the start of the year. Yet stocks have done anything but follow along. What gives?
Rates can decline for lots of reasons. But, the chief reason for the highlighted past declines was fear. As markets were perceived to become riskier, money at the margins flowed from equities into bonds and notes — bidding u prices and driving rates down.
If investors have learned anything from the past year in the “markets,” it’s that there is nothing to fear. Each (successively smaller) dip has been aggressively bought. Margin debt and complacency are at extremes. And, long-short hedge funds have stopped shorting all together.
Time will tell whether the relationship between TNX and SPX that dates back to 1998 is broken, or simply hasn’t played out yet. With QE ending next month, I tend to think the latter.
* * * * *
Today’s initial sell-off reinforces our downside case — but, only if prices move through a critical level.
continued for members…
SPX and ES ramped strongly into the close after tagging our initial downside target Friday, but there’s been plenty of negative news (China, EU, Japan, Ukraine) in the last 72 hours — adding to a somewhat confusing Fib picture. Note the strong swings in either direction in the past week, repeatedly crossing the IH&S neckline. I remain partial to the 2nd downside target of ES 1981.50.
Japan’s economy continues to contract, weakening the yen (and aiding the USDJPY) — a net positive for US stocks. The euro also continues to weaken following the Scotland polling news. China continues to falter. Net net, the dollar is the key over the next few days.
Remember the long-term USDJPY chart from December 26, 2013?
We noted that previous tags of the top of the yellow channel from 1998 had not been kind to equities, prompting declines of 22%, 35% and 57%. We also noted that USDJPY would decline in the next few days, which it did — plunging from 105.43 on Jan 2 to 100.74 on Feb 4. SPX lost about 112 points as a result — a 6% decline.
What we didn’t see coming was the BOJ’s decision to put a floor under USDJPY at 101.43. Indeed, ten subsequent attempts to pierce 101.43 were each rejected vigorously — which fueled the dollar-yen carry trade, resulting in a series of new highs for US stocks (the thin purple line.) The last boost was the strongest, taking USDJPY all the way back to the previous high — and, importantly, the top of that yellow channel yet again. And, FWIW, the Jan 2 high of 105.43 came in just shy of the .618 retrace (105.57) of the drop from the 2007 high to the 2011 low.
The big question, then, is whether the BOJ will be content with the pair trading below 106, or will they feel compelled to ramp it up to new highs? Abe’s advisor Koichi Hamada hinted this morning at further yen weakening. According to Bloomberg:
“The weak yen benefits the economy by increasing corporate profits, capital spending, employment and tax revenues even if it hasn’t boosted exports,” said Koichi Hamada, 78, who helped Abe design his reflationary policies. “It’s a positive for Japan’s economy. I understand why the BOJ is not trying to stop the yen weakening, as they see sustaining the recovery as important and the weak yen as a tailwind for the economy. The yen is back at 105 yen per dollar now and it looks like it’s going to weaken even further.”
This echoes BOJ’s Kuroda, who last week proclaimed that a weak yen “wasn’t negative for the economy.” A lower yen, of course, boosts exports. The flipside, however, is that it increases the cost of imports — which affects everybody in Japan who eats, travels, heats their home or factory, buys raw materials for manufacturing, etc.
Like the Fed, the BOJ touts a low rate of inflation by excluding many real and meaningful price categories which are positively soaring. With the nukes offline (for now) fuel prices are a particular problem.
Toss in a 60% increase in sales taxes — and another 25% increase coming next month — and the citizens of Japan are feeling the pain. Abe’s popularity slumps a little further with every tick higher in prices and taxes.
Bottom line, someone has to be thrown under the bus: either Japan’s consumers or its exporters. Neither is palatable for the politically savvy Abe, leading us to believe the USDJPY could remain in the 102-106 range for the foreseeable future, with any further declines in the yen limited to Draghi-style jawboning rather than actual intervention.
If it pushes above the January highs of 105.43, however, the question is moot. It will have broken out yet again.
…to be continued…
Futures spiked 10 points on the crappy jobs data, then promptly gave most of it back. Key chart factors: yesterday’s late day plunge further distanced stocks from the rising white channel. The backtest we surmised would lead to a decline seems to be underway, but not without a fight from the algos — characterized by three backtests (so far) of the purple channel. Yesterday’s downside target remains in play until stocks climb back into that channel and stay there.
While D1 would suffice as a Butterfly Pattern, D2 (1980ish) represents the SMA20 and the red 1.618 and the larger white channel midline. As such, it makes a much more appealing target — if TPTB allow the market to settle a little lower. And, lately, that’s a huge “if.”
Bonds prices shot up on the data this morning, clearing a falling channel. And, the USDJPY is struggling after setting a new high overnight (based more on USD strength than JPY weakness.)
The backtest by SPX is a little cleaner, but the same downside target is worth watching. On the SPX chart, 1977 represents the SMA20, the white 1.618 and the falling white channel bottom.
UPDATE: 12:30 PM
ES tagged our D1 target on the nose this morning. It remains to be seen whether we’ll get another thrust lower.
Algos have taken over again, driving the DX up toward the .886 and SMA200 on 5-min chart.
Might get a reversal here, given that USDJPY is approaching its SMA100 on the 5-min — scene of its strong reversal early this morning.
Lots of fib and channel overhead resistance at SPX 2003ish…
UPDATE: 2:55PM
SPX overshot the resistance, and is possibly backtesting it as support. FWIW, the yellow dashed line running through the chart is the neckline of the big H&S Pattern from July. Its
Seen below in yellow. Take your pick of right shoulders — either done or something more balanced like the lower “S” at the white channel midline. Obviously, prices have pushed through the neckline several times before — but, without any follow-through (your “market” run by algos…)
The USDJPY continues to tread water around the daily .886 retrace of the drop from Jan 2.
The futures went nowhere on BOJ’s non-action on rates or QE, but raced ahead 10 points on hopes that the ECB would pump up the volume. As usual, Draghi’s speech was long on promises but lacking on real import.
continued for members…
