Friday’s SPX lows got a little closer to the red .886 target at 1986.35: 1988.12 vs 1988.44 on Thursday.  Sometimes it’s hard to time the USDJPY ramp job just right. USDJPY tacked on 1.90 Friday, and another 1.16 Friday’s post-Friday’s close.

In last night’s leg up, it broke out of the falling red channel — enough to give futures an 11-pt boost (back down to 6 points as of this writing), on top of Friday’s rally.

Friday morning’s initial dip helped establish a broader potential falling channel, shown below in white.  The red channel took the pair to the midline, and this morning’s rally tests the upper bound.

If the upper bound holds, then this morning’s rally in stocks should burn out quickly after testing the SMA10.If USDJPY holds, or punches through the channel top, then SPX’s upper targets include a backtest of the broken white channel.

A little over a week ago [see: Jan 12 Update] we discussed the likely path USDJPY would take, and the ramifications on stocks.

I think USDJPY (118.34) is stuck.  I think TPTB have probably reached a limit on further yen decimation, and are trying to hold it in a range of 115-120 in order to prevent further SPX declines…If a floor can be established until the ECB begins QE — then, all is well.  SPX will be propped up.  If the floor gives way, SPX should go down and test the SMA200 (currently 1962) as we discussed last week.

USDJPY did, indeed, ultimately find support this past Thursday at 115.84.  This enabled SPX to be propped up, leading to the little double bottom that couldn’t quite reach a simple Fib level.

Gotta love our unrigged markets…

UPDATE:  9:54 AM

Speaking of which — USDJPY just reached the bottom of its little rising wedge…

…meaning SPX should find support at the white TL after this morning’s sharp reversal.  If not, the SMA100 is just below at 2007.85.

UPDATE:  10:16 AM

The consolidation we’ve expected over the past two weeks has been driven almost entirely by the USDJPY.  It’s essentially out of gas, meaning some other device has to come along to prop up stocks: the EURUSD.

The ECB is widely expected to announce new easing measures on Thursday the 22nd.  If they do, the EURUSD will pick up where the USDJPY left off.  If not, then the “market” is — what’s the technical term? — oh, yeah…screwed.

In between now and then, I imagine we’ll get a series of stick saves courtesy of the USDJPY — which will ultimately settle into the trading band discussed above.

More shortly.

UPDATE:  11:04 AM

A little deeper into the lower bound for USDJPY…

…means a tag of the SMA100 for SPX.

11:40 AM

As discussed above, the presumption is that the ECB will come through with massive QE on Thursday, and stocks will be off to the races.  If not, the downside could be substantial.  We’ll take a moment, here,  to pinpoint some potential targets.

continued for members…

As always happens during consolidations, the Fib picture is extremely messy.  I’ve attempted to clean up the charts a bit, and show some Fib targets below.

If the ECB does as expected, then our upside target of 2138 is probably only a week or two away at most.  Recall that this is the 1.618 extension of the drop from 1576 in 2007 to 666 in 2009.

If they disappoint, and the falling white channel should expand, it opens up some downside targets based on the rise from mid-October: the red .500 and .618 in particular.  Here’s the daily chart, showing the key moving averages.

• thin red: SMA10
• white:  SMA20
• purple: SMA50
• yellow:  SMA100
• thick red: SMA200

There are a number of potential channel lines that could come into play.  But, frankly, it’s a crap shoot.  As a result of the frequent interventions on the way up, the rising channels are a mess.  I don’t trust them a bit.  But, I’m pretty sure that wherever the next bottom is established, it will be justifiable by connecting a few recent bottoms.

The most negative target still supported by a rising channel (red) bottom is the red .786 down at 1879.

UPDATE:  12:15 PM

Quick updated CU with the previous chart patterns/Fibs detailed:

UPDATE:  3:30 PM

SPX running out of steam…

…as USDJPY reaches resistance again.  Good place to take profits and sit out overnight.   The 2042-2047 upside target is still in play, but would probably require some help from USDJPY or VIX.