In an attempt to convince the world that the economy was, indeed, robust, the FOMC recently raised rates.  It was also a bid by the Fed to retain what little credibility it has left.  It failed.

As I have been writing for the past couple of years, the yen carry trade [what’s this?] has been the primary lever of higher stock prices since 2011.  As long as the yen continues to get cheaper and the dollar richer, the USDJPY climbs higher — taking stocks along with it.

But, the Fed’s actions exacerbated a currency crisis going on in secondary markets.  Hot money from the slush fund known as Japanese financial markets flowed back into Japan.  The yen strengthened.  Two days ago, the USDJPY plunged below the bottom of a channel dating back to October 2014 — seen above in red.  As we pointed out at the time, every dip to the bottom of this red channel has caused a sell-off in stocks.  And, each successive dip has produced larger and larger sell-offs.  This latest one, which dipped below the channel bottom, produced the worst.

At the same time, SPX and ES dipped below necklines of large Head and Shoulders patterns that targeted additional 15% declines.  As I wrote yesterday:

If, on the other hand, it closes back above 1887 or so, then bulls can breathe a little easier.  The RSI charts indicate it’s not too late.  But, again, it can’t happen without CL and/or USDJPY moving dramatically higher.  Today was a start.  Will they keep it going?  It must start right here, right now.

Last night, “sources” leaked that the BoJ would increased QQE — code for a higher USDJPY, which enables the yen carry trade to soldier on.  Kuroda begrudgingly confirmed the reports this morning.  USDJPY is up over 2% since Wednesday’s lows. And, Saudi Arabian Oil CEO Khalid Al-Falih confirmed that oil had overshot to the downside, and was due to rebound.  CL is back in its falling red channel, having spurted 15% higher in the last two days.  This is equivalent to a 285-pt rally in the S&P 500 or a 2,400-pt rally in the Dow.

Is it any wonder the futures are up over 30 points at this time?  Central bankers won’t be able to toot their “the economy is good enough that it doesn’t need supporting anymore” horns.  Oh, well.  Credibility is overrated, anyway.

continued for members…

ES has rebounded to above its SMA10 and is testing a .886 Fib retracement of the drop from Tuesday’s highs.It will be enough to get SPX back above its neckline, and probably test its SMA10 at 1902.96.  Long positions should probably be pared at that point, depending on how USDJPY and CL are performing.UPDATE:  9:50 AM

SPX is almost to the SMA10, but has much further to go. The IH&S targets 1972ish.  Whether or not it pushes through right away, I don’t know.  ES is tagging its red .886 at about the same time. UPDATE:  9:56 AM

I’d go ahead and take profits here at 1902.44.  I’d go to cash, not short, as it could push through.  If they’re clever about it at all, TPTB will allow a backtest of the IH&S neckline at 1886 or so.  But, they’ll probably allow the SMA5 20 (white) to scoop it up when it arrives on the scene.

UPDATE:  10:58 AM

The SMA20 has arrived.  It often lifts SPX higher, but there’s a good argument for 1889.5 or the neckline at 1884ish — the two white dots below.  UPDATE:  11:15 AM

It looks like we should get a slow, steady decline here.  I’d short here at 1894.98 for a quick trade down to 1889 or 1884. Just watch your stops, because when it turns it will likely be sudden.UPDATE:  1:47 PM

SPX just eased up past 1902.96.  And, though I think it probably won’t last, I don’t like being the frog in a pot of water slowly approaching boiling temperature.  I’m bailing on the short here at 1903.13 and will reestablish it if things reverse.  Just know that it might well happen bear the close, or not even until Monday morning.CL and USDJPY are making it happen, and it will turn on a dime if they ever stop mashing the big MELT-UP button. UPDATE:  2:00 PM

If you’re a glutton for punishment, this is as high as SPX should go if it’s going to reverse.  It’s reached the .886 retrace of this morning’s drop, so it should decline here if it’s going to.  I’d try a short position here at 1904.73, but with an absolute stop at 1907.

Just be aware that I’m going to be working on other charts, and won’t be watching this one.  The initial target is the bottom of the rising purple channel — currently at 1895 — followed by the neckline at the close of around 1882.UPDATE:  3:08 PM

If you’re hanging on to the short position, it just pushed below the SMA10 and the purple channel bottom.  If you’re interested, this is the last shot at a decent short setup.  I’d try a short position here at 1901.63.

Just be cautious around the SMA50 at 1900ish, as it might provide support.  I’m thinking, though, that  somefolks playing the meltup might be nervous enough about holding over the weekend that they’ll take profits in the last hour of trading.UPDATE:  3:34 PM

USDJPY is spiking and VIX is dropping, so I assume they’re going to levitate this into the close.  Back to cash for the weekend.