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.
continued for members…Some random thoughts on the fly…
Our analog originally called for a return to new test the highs in mid-September. This, of course, was predicated on the idea of the BoJ (or, potentially the FOMC or ECB) either increasing easing or at least devaluing the yen much further in order to support the yen carry trade.
Problem is, the BoJ isn’t biting — at least not yet. Unless they announce over the weekend — which they very well could — then the analog will be challenged in meeting our prescribed time frame.
Without getting into the politics of it, I have long maintained that they must be sufficiently scared out of their skin in order to visit more (in particular, fuel and food) inflation on Japanese consumers and (fuel and raw materials) businesses.
The Bearish Scenario
Just the other day, Kuroda said he didn’t think more easing would be necessary — this, while the Nikkei was off 18% from its highs. Really!?
From the looks of it, and the USDJPY action, I’d say there’s a very good chance it’ll go down and tag the .618 around 17,000 that was our original target last week. That’s a 19% decline — about 2.5% of Japan’s GDP — in losses since June.
One thought is that since SPX pretty clearly isn’t going to do any “breaking out” on Tuesday, they’ll use Labor Day as a way to scare the crap out of Japan without hurting US stocks too much. Sure, the futures would get creamed, but they could always rebound it before the cash market opens on Tuesday morning.
The other possibility is to let SPX follow it on down, but gapping down on Tuesday so us muppets don’t get the chance to play along. As you’ll recall, SPX never reached its .886 from last October 15 in last week’s plunge. It hit 1867.01, just above the Bat Pattern completion that would have come at 1856.46. It’s about 61 points below current prices — steep enough to leave a mark.
Either way, a “resumption” of last week’s scare might be just what the BoJ needs to get them off the dime. With their meeting coming up on Sep 14-15 and the FOMC’s on Sep 15-16, one or the other should be goosing the markets if it doesn’t turn around by itself.
The Bullish Scenario
As unlikely as it seems from today’s action (and, isn’t that the point?) SPX still has a shot at getting to 2138 by Sep 16. An expansion by BoJ and no rate increase by the FOMC would, together, provide all the necessary fuel. And, there is a precedent: last October.
Bullard’s on-air musings about bringing back QE were enough to rocket SPX from 1820 on Oct 15 to 2024 by Nov 3. That’s 204 points in 13 sessions. BTW, on the 12th session (Oct 31), when SPX was deliberating whether or not to make a new high, the BoJ announced their most recent QQE expansion.
Here at 1918, we’re 216 points away from the old high, and 220 away from the key 2138 Fib. Thirteen sessions from right now would be Sep 24 — well past all the central bank goings on. It’s steep, but no more so than the October rally.
Which one will it be? The plunge to 1867.01 on Aug 24 seemed like a pretty convincing bottom, except that we never heard any panic from Japan or elsewhere. It was followed the 25th by a huge bounce and subsequent decline to 1867.08. So, technically, Aug 25th could be called a deep retracement. And, the action since then could be a series of 1-2’s that still points higher.
Given the fact that Japan hasn’t (at least publicly) capitulated, I’d say the chances of another leg down — call it a truncated 5th — are at least 50:50. But, it doesn’t mean we won’t be back up to 2138 within the month. Daredevils might consider a straddle; those with a death wish might toss a coin and place a bet either way before the close. One way or the other, it’ll be pretty exciting.
If I had to bet one way or the other, I’d stay with 2138 in late September. But, I’d sure not I’d wager much until we see how this weekend goes. The last few days has felt very controlled, no capitulation whatsoever. This usually means its a head fake.
Bottom line, my gut tells me stocks will continue to decline until NKD at least tests 17,000 before starting back up again. But, since this could easily happen on Sunday or Monday, when US “markets” are closed, it leaves no completely safe way to play it.
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. If it is to rise, however, there will be plenty of days in between here and there to participate in that upside to 2138. If it’s to decline, well, we’ll cross that bridge when we come to it.
As for yours truly, I’ve been up since 3am, so I’m going to sign off and sleep for a day or so. I’ll be back at it this weekend, catching up on various other charts and taking a look with fresher eyes. FYI, the site might be down over parts of the weekend as we do some maintenance type work.
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BTW, since I’ve been composing this, NKD has fallen another 200 points. It’s now at 17,520 — off 3.78% on the day. 17,000 is less than 3% away.
