We’ve been wondering for the past month or so whether SPX would take a shot at pushing through the upcoming major resistance at 2138-2145 prior to year end, or hang back in a “safe zone” until after 2014 was in the bank.

The key determinants have been a select few instruments and currencies: VIX, DX, USDJPY, EURUSD and 10-yr notes.  In years past, these were secondary indicators — reflections of the activities in global equity markets.  Now, thanks to the dominance of the carry trade and algorithmic trading, they are the tails that are wagging the stock market’s dog.

As the US dollar has soared relative to the yen and euro, VIX has been beaten into submission, and 10-yr note yields have continued to slump, the carry trade has had the wind at its back.  Stocks have had no trouble ignoring unimpressive earnings, macroeconomic and geopolitical news, and normally reliable chart and harmonic patterns.

So, we’ve focused instead on the prognosis for these determinants in the hopes they might provide a road map for broader market indices.  Back on Dec 3, we set five year-end targets suggested by the charts, most of which have been reached: EURUSD, USDJPY, DX [see: Update on Currencies.]

In chart and harmonic terms, reaching a target usually suggests a reversal.  Yet, EURUSD has dropped through strong support at our initial target of 1.2263.

And, DX and USDJPY are being propped up at our year-end targets (and, important levels of resistance —  DX at 90.272…

…and, USDJPY at 120.11.

A reversal would most certainly mean an end to the current rally.  Therefore, the fact that they are being held at current levels suggests a continued holding pattern for stocks — at least through the end of the year.

VIX has likely topped out for now, with a backtest of the white channel midline suggesting the next leg will be lower.  As one of the last remaining levers at the Fed’s disposal, look for it to continue sliding — even though the purple .886 has already been tagged twice (though 16.75 would have been more convincing.)

A drop to 13.09 looks like a foregone conclusion, and a push below 11.53 would easily push SPX above 2100.

TNX, as we’ve previously noted, reversed at a short-term TL connecting the past month’s tops.  There’s a pretty good argument for completing an A=C move up to 25.70ish. Though a slide to the pale blue .886 at 19.28 looks just as likely.Herein lies the chartist’s dilemma — which indicator determinant to believe.

continued for members…Anybody who still has any faith in harmonics is expecting a big reversal at 2138-2145.  While, those who are determined to keep stocks on the rise will be working to prevent one.

Central bankers and their proxies can’t lower short-term rates much more.  But, they certainly understand the mechanics of the carry trade and are quite adept at providing the fuel in the form of currency, VIX and bond price manipulation.  I think they’ll pull out all the stops if prices falter at or near 2138.  As I wrote nearly a month ago:

Should any of the indices max out prior to the grande finale, look for the others to carry the load.  There could easily be a succession of lifts from individual components rather than one concerted effort.

TPTB could easily continue to clobber VIX and bond prices, driving stocks to 2138 without violating EURUSD, USDJPY and DX harmonics patterns.  In order to break through SPX 2138, they would likely need to break through our currency targets.

Which is more likely?  I think the EURUSD is ahead of itself.  As things stand now, the euro doesn’t seem likely to cheapen any more relative to the dollar.  I believe we’ll see the EURUSD rally and the DX slide.

The USDJPY, on the other hand, continues to benefit from Abe’s apparent disregard for the basic laws of math, his desperation — or both.  But, the opposition to an ever cheaper yen continues to mount.  So, a meaningful reversal at the .618 is still in the cards.

The Fed can easily continue to pound VIX lower.  It’s the one wild card that seems to be quite effective while being relatively cost effective.   But, many investors still use it to speculate on big declines in stocks.  So, it’s much less useful in turning back a sharp decline than it is in bumping stocks past resistance.

The Fed’s Achilles heel is the 10-yr.  Lower yields have become highly correlated with lower stock prices over the past several months.  So, if TPTB want to drive stock prices higher, they’ll have to either break that correlation or put up with higher interest rates — which the US simply cannot afford.

This sets up a huge quandary for the guys pulling the strings — one which has been a long time coming.  I wish I knew what they had planned, but I suspect that they, themselves, aren’t too sure.

For now, the MO seems to be keep nudging stocks higher, keep interest rates low (while promising they’ll rise), and keep the dollar strong (in order to keep inflation in check.)  In the end, I think they’ll allow a reaction at 2138 in order to reset some of the determining instruments. But, my expectation is that it’ll be arrested before it becomes a “problem.”

To be continued…