Charts I’m Watching: Jan 30, 2015

Yesterday’s equity price action revolved around whether or not USDJPY would break above the purple channel top in order to test the upper bound of a triangle pattern it’s been tracing out since Jan 20. From yesterday’s initial post:

Note that USDJPY bounced off the lower triangle bound, and is again flirting with the channel top and a return to the [triangle] upper bound. I believe it’ll pop out of the channel — even if it’s only intra-day — and provide a nice lift for SPX. If it doesn’t, then the falling red channel could get SPX down to the SMA200 by late today or tomorrow.

That’s exactly what happened. USDJPY’s initial pullback at the channel top drove SPX to its lows of the day where it was stick-saved at a mere 1.02 above the previous low, thereby keeping the IH&S Pattern (technically) alive.

The stick save was accomplished by a push through the channel top to the triangle upper bound referenced above, which it held long enough to drive SPX 35 points off its lows. USDJPY held those prices through the close, at which point it fell all the way back into the channel and is testing the triangle lower bound.

Though SPX’s initial drop was lower than we expected, the rise was along the lines of what we were looking for:

TPTB might want to breach Tuesday’s low (2019.91) in order to screw up a potentially bearish wave count. A move by USDJPY above the triangle top could do it. Be cautious, as the algos seem to be back in charge.

SPX reached 2024.64 before falling back to close at 2021. USDJPY’s fall back to the triangle bottom has driven futures down over 20 points. A backtest of the falling white and red channels at around 2006 seems like the easy call. Whether it holds at that point will depend on… wait for it…whether USDJPY bounces off the triangle lower bound for a 6th time.

Hopefully there’s no doubt in anyone’s mind anymore that the daily direction of the “market” is being almost completely determined by the yen carry trade. Since the daily price action of USDJPY is almost completely manipulated by central banks and HFT algos, that means the stock “market” is also.

The chart pattern in USDJPY makes it rather obvious. But, as we wrote several weeks ago, it seems that TPTB don’t really care anymore just how obvious are their day to day manipulations. Pick a price for USDJPY, peg it there, and voila! — SPX goes right where you want it. Almost makes one yearn for the good old days of market maker manipulation.

UPDATE: 9:50 AM

It’s– it’s– a miracle! You’ll never guess what happened…!

SPX tagged the SMA100 and bounced about 8 points so far. In case you’re thinking “this can’t go on forever; the triangle is contracting,” you’re right. The triangle’s apex looks to be about Feb 16. And, the top of the purple channel passes beneath the triangle’s lower bound next Wednesday.

But, as we saw last night, USDJPY’s rises produce more upside for SPX than its falls produce downside. This has been the case for the past two years, and isn’t likely to change anytime soon.

USDJPY is coming up on the purple channel top again, meaning yet another opportunity for a reversal.

continued for members…

I believe SPX will get down to our target — or at least close to it when USDJPY reverses. At that point, it’ll be up to the algos to see whether or not they can erase January’s negative print (-1.83%) by the end of the day.

By my calculations, we’d need somewhere around 36 points, or SPX 2051. It would be a massive reversal off today’s lows, so probably not too likely. But, I wouldn’t put it past them to try. According to Deutche Bank’s Jim Reid:

A good January has usually (but not always) been associated with a good year for US equities. Indeed using 87 years of data from Bloomberg, there have been 55 positive Januaries with 44 of those going on to have positive years with an average increase of about +20%. Of the 32 negative January months that we’ve had since 1928, ‘only’ 14 of those went on to finish the year higher in the end with average annual returns of around +14%. The remaining 18 negative Januaries were associated with a negative full year performance with an average return of around -14%. Clearly past performance doesn’t guarantee future returns and its a bit spurious but its always fun to look at. Indeed post crisis we’ve seen a few counter trend moves as three years (2014, 2010 and 2009) have seen the year bounce back from a bad January performance.

Note that the exceptions to a bad January portending a bad year came in years with substantial QE. Probably just a coincidence…

Of course, if they decide to let USDJPY give up that triangle, then there’s plenty more downside — the SMA200 at 1974, for starters. But, as we pointed out yesterday, that would mean wasting a perfectly good IH&S.

UPDATE: 11:10 AM

USDJPY just dipped below the triangle…

…meaning SPX’s bounce is fading fast.