Bank of Japan: Ready to Pull the Trigger?

Written by

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.

* * * * *

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?

continued for members...

Last night’s ramp job should bring SPX back to the neckline of the recently completed H&S Pattern, our upside target from yesterday — about 1906 and change. From there, we’ll have to see what USDJPY does. If ramped tremendously on the QQE speculation, spiking back above 120.11. But, now it has backtested the key level, and hasn’t yet announced it’s next direction.

Odds are it will continue to the upper bound of the triangle in order to attack the veracity of SPX’s H&S Pattern, but we’ll wait and see.UPDATE: 9:34 AM

SPX has reached the neckline (and, a little more.) So far, USDJPY is holding up, so there’s no point in selling just yet.SPX’s next overhead resistance is the purple .786 line at 1913, followed by the broken white channel bottom at 1916, and the purple channel top at 1923.

UPDATE: 9:43 AM

SPX just reached the purple channel .786 line and very nearly the white channel bottom. We should see it pull back here, so I’ll take a tentative short position at 1912.30.

FWIW, USDJPY just dipped below 120.11, but it has channel support down around 119.96. So, this downturn doesn’t have much potential unless that channel breaks down.The best options I can see, assuming USDJPY stops at channel support, are a backtest of the neckline at 1906.75 or the SMA200 at 1900.

UPDATE: 9:58 AM

The reversal could be counted as having occurred at the purple .786 channel line, so the purple midline is also a potential target. But, the neckline and 1900 remain better choices.

UPDATE: 10:07 AM

USDJPY just tested the channel bottom, but couldn’t even get SPX down to the neckline. Back to long here, but note that USDJPY is still below 120.11 and has some moving average lines heading its way. It could still make a more concerted effort to tamp down the enthusiasm and create more of a backtest for SPX.

UPDATE: 10:38 AM

SPX just reached the broken white channel bottom at 1916.50 — also a minor falling red channel line. I’ll try a short position here, but blow it out quickly if USDJPY doesn’t react.

Note that the white .618 is just above at 1921.96. If SPX is going to tag it within the confines of the falling purple channel, it should happen very soon. Given the nature of headfakes, maybe it won’t!

USDJPY’s previous retracements in this channel have amounted to .618. In this case, that would be around 119.66 — also a 60-min SMA50. We’ll watch for it. Maybe it’ll get SPX all the way back down to 1906 or 1900.

If that doesn’t hold, watch for the red .382 at 119.58 or the .886 at 119.367.

UPDATE: 11:08 AM

Looking for a bounce at the white dot.UPDATE: 11:11 AM

USDJPY bounced as expected, and SPX bouncing up to backtest the SMA10 that’s rolling over (1913.36.)UPDATE: 11:45 AM

Oops! Overshot the neckline a little. Or, are they going further? Good place to take profits or at least set tight stops on your short.

USDJPY playing ’em close to the vest. Though you would think it would start spiking if this was a big fat mistake. In other words, could well be heading lower.UPDATE: 12:00 PM

USDJPY has reached channel resistance and that SMA20, so I’m thinking the bounce will die here at the top of the hour. FWIW, I see 4 completed waves down. 5th of 3/C to come? SPX’s SMA10 approaching — gave it a push downward earlier. Not giving up on another leg down just yet. The question is “to where?” We talked about 1900 earlier — still a good option with the SMA50 there. The SMA200 and SMA100 are closing in on 1895, and the purple midline is now around 1890. My best guess is 1900, but it all depends, of course, on USDJPY.

UPDATE: 12:17 PM

SPX just reached 1900.65, but no bounce from USDJPY yet. More? If there is another leg down coming, it should wait on the descending SMA10 (red.) It could even piddle around for 10-15 minutes till the SMA20 arrives at the neckline and do a backtest of both.UPDATE: 1:17 PM

This little spurt up through the natural reversal point brought to you by USDJPY. It should reverse at the neckline, but don’t be surprised if it doesn’t. Best to be long, but be ready to short when SPX reverses there. Or, you could just wait on it and hope the algos don’t ram it through… UPDATE: 1:20 PM

Just reached the neckline, shorting again at 1906.12. Just know that a common trick is for the SMA10 to come along and scoop SPX higher into the afternoon, sometimes even resulting in a higher high.

If so, they’ll probably try to defend the white rising channel’s midline, then perhaps aim for 1921.96. The alternative is to see USDJPY run into resistance again and run the whole mess back to SPX 1888.94 near the close.

UPDATE: 1:40 PM

USDJPY not reversing at all the obvious opportunities…

…so I’ll assume they’re going to ramp it up through the neckline again. Back to long here at 1905.69. Don’t see a lot of overhead resistance until

the purple channel top at 1916ish, near this morning’s high, then the white .618 at 1921.56, followed by the rising white channel top – price depending on when.

The key will probably be USDJPY backtesting the broken channel from this morning which, right now, looks like 120.11. How ’bout that for a coincidence?UPDATE: 1:57 PM

Not a lot of confidence in this move, but ES just tagged the .786 channel line. So, I’ll take a flyer on SPX declining here. Short here for another potential neckline backtest.

The other downside targets are still there (1891.02 at 3:40?), but this is the end of Q3. And, given the quarter is already so crummy, it’s less likely to end on an even lower note. UPDATE: 2:33 PM

Pulling the plug on the short now that we’re back at the fan line/channel midline/neckline. If it pushes lower, I’d think about shorting again. But, this is decent support.

It seems pretty clear that the top of the purple channel is going to coincide with SUDJPY reaching the SMA200 or the red .618 at 120.03. A break through 120.11 and/or the channel bottom means a breakout for SPX.BTW, I just discovered the trigger for this morning’s abrupt reversal at 1897. NKD had dipped below a TL from yesterday’s lows and ran into support at the 60-min SMA50. Goofy as it seems, that was the trigger for the algos to kick into buy mode.

Note how the subsequent bounce stopped right at the SMA100. Based on this chart, I’d say the SMA200 remains an appealing target up at the .618 of 17684.UPDATE: 3:01 PM

Just reached the purple channel top. I suppose they’ll allow at least a small decline, the better to suck in some bears before pushing through. Short here, but with very tight stops.

UPDATE:

USDJPY breaking down a bit, I suppose to get SPX down to the SMA20 or channel midline one more time.At this point, it appears SPX might not break out before the close. Bottom line, they don’t want muppets like you and me to participate.

They’d rather keep it to themselves, them and the other big boys who can participate in the futures markets overnight, and who can easily move those markets in case they don’t like what they’re seeing.

Bottom line: whichever way it closes, it’s likely to do the opposite come tomorrow — with an overall bias toward the upside.

UPDATE: 3:31 PM

There it goes, through the channel top. I’m out here at 1913.60. Playing along on long side with tight trailing stops. Targets are he white channel 786 line at 1919.70 and .618 at 1921.96. But, honestly, TPTB don’t care much. They just wanted to make sure that 1916.50 is broken to bust the purple Fib’s downside scenario.

I’d close out if it dips back below the dashed purple TL, currently around 1914.45.

NKD is on its way. I’ll close SPX when NKD runs out of steam — either 17670 or 17685.

UPDATE: 3:49 PM

SPX running into white channel top again. Should push through, with potential to reach all the way to 1930.24 if there’s a big imbalance.USDJPY not participating, tho.UPDATE: 3:52 PM