The US dollar’s breakout from a long-standing falling channel on Oct 28 was accomplished with the assistance of the euro and the yen — both of which have been steadily weakening.

What might it mean, then, that the dollar just reached a point of important overhead resistance as the other two reached important support?  Might it take on added importance since, as BofA/Merrill pointed out yesterday, the long dollar is currently the most crowded trade?

continued for members…

While DX reached its .886 retracement of the drop from 100.78 to 92.52, USDJPY is still hovering at its .886 of the drop from 123.60 to 122.21……and EURUSD came with a breath of its .886 from 1.04 to 1.17.The futures are currently showing a 5-pt gain, but it’s on a backtest of a broken megaphone (white) within a still-intact megaphone (red) and the SMA200 is just above.  I’d be looking to fade this rally at the open.UPDATE:  9:33 AM

I’d short SPX right here at 2058.91.We had several good short setups yesterday, but each time USDJPY rallied just enough to maintain an uptrend of sorts.  It’s a very messy pattern that is total nonsense.

But, the algos don’t much care; they’ll obey it anyway.  In other words, keep an eye out for a sudden spike up above the .886 — even if it has no basis.

Our initial downside target remains the bottom of the rising purple channel — now about 2043-2048 depending on when it occurs.  If it fails, then a backtest of the SMA100 (2033.31) is the prize.

If SPX can push through the white channel midline it just backtested, there are multiple targets to consider: the SMA200 at 2064.38, the SMA10/20 cluster at 2070-2073, the white .786 at 2072 and .886 at 2079.

UPDATE:  9:54 AM

The algos are going strong this morning. SPX just popped above the megaphone top and is testing the SMA200.  If it can top it, I’ll take my lumps and switch to a long position. UPDATE:  10:04 AM

The SMA200 survived the first assault, but here comes the USDJPY to give it a little extra push. 

It’s pretty obvious that the USDJPY leverage being used has no basis.  It’s a brute force approach that has proven to be practically foolproof.  As idiotic as it is, there’s no point in fighting it.

I’d dump the short position and revert to cash here, as it appears TPTB intend to keep SPX close enough to the SMA200 so that the FOMC minutes coming out in 4 hours are able to force it up and over.SPX might or might not get any downside going between now and then, but I suspect it’ll be solely to head fake traders in advance of the big show at 2pm.

I’m going to sign off for a while and get some other charting done.  I’ll check back in in an hour or two.

UPDATE:  1:55 PM

Death (to bears) by a thousand cuts…

USDJPY has shoehorned SPX to higher highs, leaving the SMA200 in the dust.  But, there’s no guarantee it will hold.  Here are the two charts to watch, with key price levels for SPX:

DX has settled back down, now that the SMA200 is in the rear view.I’d like to say SPX is poised to drop, but I don’t much trust this whole setup.

UPDATE:  2:16 PM

Initial reaction from the “markets.”  SPX should reverse here at the SMA20 and purple channel midline, though the .618 of the drop from 2116 to 2019 is slightly higher at 2077.45.DX lost the latest TL and tested the purple channel bottom, but is bouncing back and, thus, propping up stocks.USDJPY jumped around, but has settled back where it was.  Note that it didn’t quite reach the white .786, which leaves it the option of rallying up there if necessary for propping purposes.…and, EURUSD also flitted about only to end up higher.  Yes — dollar weakness at the same time that the DX is rallying on neutral USDJPY.  Utter BS.TPTB will now do their best to prevent any downward momentum.  And, with the SMA200 and SMA10 as support, it shouldn’t be that difficult.

Having said that, I have a hard time going long on moves that are completely manufactured by levers that are temporarily exceeding resistance.  Odds are we’ll get at least a backtest of the SMA200 at 2064.38 — so that’s probably a safe trade for you nimble types.

UPDATE:  3:48 PM

Lots of stop running and algo pumping – especially involving CL and EURUSD.  Daredevils might wish to establish a short here to play a back test of the moving averages — any of them.  Note that they are all now lower than SPX is currently trading.

Of course, holding overnight is never all that safe, so I’d do it only if you can hedge or watch it like a hawk.  It’s especially important since the next highest resistance is the white .786 at 2095.70.