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In yesterday’s post The BoJ’s Turn I left off with the suggestion that the BoJ would disappoint and the USDJPY would initially tumble to 102.87, followed by a drop to 101.618.  In the subsequent Update to USDJPY, I laid out my reasoning — which is no different from what I’ve been posting for the past year or so.

Japan’s economy has failed.  The only thing keeping it alive is the massive amount of money being thrown at it and very low — now negative — interest rates to pay for it all.

For years, the continually devalued yen supported the yen carry trade, which guaranteed that stocks in Japan and in key markets around the world would continue to appreciate.

The yen bottomed out (USDJPY peaked) last year because Japan could no longer afford higher oil and fresh food prices, which produced real inflation without any economic benefit. Both are almost entirely imported; fresh food prices soared over 12% between November and February.

If the BoJ were to further weaken the yen, it could only do so if oil prices were to continue falling to compensate.  Since lower oil prices could ruin banks and big oil companies, TPTB had to make an unpleasant choice:  support Japan’s exporters and the yen carry trade with a lower yen (higher USDJPY) or support banks and oil companies.

Judging from the fact that USDJPY continues to tumble and oil futures are up strongly off our downside target, it’s apparent which choice they’ve made.continued for members…

I charted CL and USDJPY extensively in last nights update on USDJPY.  So far, CL has rebounded nicely after overshooting the SMA200 a bit. But, I don’t believe it’ll be a straight shot to 45 for it or a straight shot to 2138 for SPX.  Rather, the 2157.38 target will have to be tested first.  And, even that’s no guarantee today, as TPTB might try to keep things from deflating too much in the hours before the weekend.  Today is the last day of the month.

The fundamental basis for a modest decline will be today’s GDP report, which puts a damper on the notion of a September rate increase.  And, let’s not forget that the BoJ’s most significant action was an increase in ETF purchases.  So, we can expect support through that algo transmission line as well.

Our downside targets for SPX remain unchanged.UPDATE:  10:26 AM

Things are pretty much on track.  USDJPY’s falling white channel has broken down, and it appears to targeting 101.618 around 11:45am – 12:00pm — timing which jibes with SPX’s 2157.38.  It’s unusual timing for a bottom, so I don’t read too much into it — especially as VIX is being heavily suppressed this morning. ES, on the other hand, suggests the bigger drop (all 13 points of it) won’t come until late Monday.  So, we’ll see.UPDATE:  11:07 AM

Thanks to a strong spike in CL and a strong smack-down in VIX, SPX just posted a new high.  This, despite USDJPY making lower lows.  This technique has been quite effective for the past several weeks.  So, there’s no reason to expect that they’ll abandon it now — particularly on the last day of the month. 

Remember, we do have an upside target at 2180-2185 — the top of the rising purple channel — depending on how aggressively they want to force things higher.  At this point, I’d say there’s nothing wrong with riding along on the upside with tight trailing stops.  Once these algos get going, it’s very hard to turn them off.  And, if USDJPY reaches and reverses at 101.618, it would likely add fuel to the fire.

But, my expectation remains for a sell-off on Monday or Tuesday of next week.  So, the sidelines is a safer place to be at this time unless you’re willing to hold short over the weekend.  For those thinking about it, I can only recommend it if you’re able to stomach a potential gap up or can hedge your position.  Fortunately, there’s an easy way to do so at this time — using CL, VIX or USDJPY.

UPDATE:  12:12 PM

This would be the logical place for SPX to reverse if it’s going to.  Note that VIX completed a deep retracement and is on the way up, CL appears to be consolidating, and USDJPY is till edging lower.   Anyone who’s tagging along on the breakout should consider taking profits or establishing a short position. UPDATE:  3:55 PM

End of the day coming up…VIX and CL still driving stocks higher.  Don’t see any fundamental change in what to expect.