Mixed messages from yesterday’s “markets”…

USDJPY is flirting with losing the rising white channel after reaching the purple .886.

While DX definitely appears to have begun a reversal after reaching our .886 target.

And, 10-year treasury yields finally broke down from the triangle.

The outlier that conflict with all these bearish signals? VIX broke a rising trend line yesterday.

Unfortunately for bears, this is probably the only chart that matters at the moment.

continued for members…

As we discussed Monday, VIX has declined at a faster rate than it ever has since its (also faster ever) rise to 31 in mid-October.  The rise was legitimate — an unleashing of pent up fear about stratospheric stock prices in an environment of deteriorating fundamentals.

The fall, however, was engineered by central bankers working in unison to drive stock prices up through resistance, effectively decoupling them from technical, fundamental and macroeconomic indicators.

The use of VIX to manipulate prices has been well documented in these pages.  I have no inside knowledge of the exact mechanism or players, but it is widely rumored and probably true that Citadel — on behalf of the Fed — aggressively shorts VIX futures contracts in order to trigger equity rallies.

We have seen this happen over and over again, particularly when a market sell-off is accelerating as was occurring in mid-October.  It is a very effective tool, as it triggers  so-called momentum ignition algorithms to go long.  A reversal in the e-minis can usually be seen within seconds, and the cash markets generally catch up within a minute or two.

I strongly believe the market’s recovery following Bullard’s suggestion that QE be continued was aided by an active program of shorting VIX, yen and treasuries.  It was so effective, that is being employed here to force prices up through what would otherwise be strong resistance.

Is it a case of the tail wagging the dog?  Sure.  But, it works.  My expectation is that it’ll continue to be used to keep prices within striking distance of the next major SPX target of 2138 (the 1.618 extension of the drop from 2007 to 2009.)  There may even be a reversal at 2138, aided by a decline in USDJPY, NKD and bond yields, to suck in a bunch of bears.

Then, probably sometime around Jan 2, the final blow will be landed — sending stock prices up through 2138 which will then be aggressively defended.  It will probably involve USDJPY hitting the white .618 at 120.05 or even topping the previous 124.13 high.

Here’s a look at last year’s finish, with the 1.272 at 1823 being the nominal target.  Remember, on December 18 the Fed announced the first taper of the monthly QE: from $85 to $75 billion.  They needed something to counteract investors’ fears.

USDJPY was ramped up by 1.7%, while VIX was monkey-hammered by a whopping 15.2% from 16.21 to 13.74 — an exercise that would be repeated until VIX finally bottomed at 11.69 on Dec 26.

SPX rallied 43 points on the 18th and continued to melt up, barely pausing at the 1823 Fib line — but, sure as the world, backtesting it twice in early January before investors finally called BS on the whole exercise and sent SPX back down by 113 points in early Feb.

Here’s another look at a VIX chart, with SPX shown in the background.

Bottom line, look for more of the same this year.  The stakes are just as high, if not higher.  And, the Fed has had a whole year to perfect the technique.

GLTA.