Yes, I’m supposed to be off today.  But, I couldn’t resist commenting on the bloodbath facing traders as they return from the holidays and pointing out some likely downside targets.  While China, Iraq et al are making the headlines this morning, the biggest problem is that USDJPY’s recent slump just became more of a rout.We noted two weeks ago that the rising white channel broke down — followed in short order by the only TL that might have salvaged trend.  Now, its only potential salvation is completion of a Bat Pattern to the .886 at 118.70 that I didn’t expect to occur for another couple of weeks.

While CL is ramping as fast as it can, this is the scenario TPTB have been fearing: no catalyst for the algos.

continued for members…CL might have broken out of the falling red channel, but not convincingly so.

If USDJPY rebounds, as it should, off the white .886, then today’s damage to SPX might be limited to a higher low than Dec 18’s 2005.33.  But, the charts suggest a drop to 1965.34 in the coming days.  So, I would be very careful about trying to catch this particular knife.

I’d start out short and look to take profits as soon as USDJPY and CL start ramping — perhaps around 2006.59.UPDATE:  9:36 AM

SPX has reached our initial target, and USDJPY is (at least) backtesting the broken TL, so I’d look take profits on initial short position here at 2005.55 and watch for a bounce. I wouldn’t take on a long position unless USDJPY stays above the white TL and starts some serious rebounding.If USDJPY can’t hold the TL, then I’d jump back in for downside.  Again, the ultimate target looks a lot more like 1965.

ES supports this forecast — though the timing looks more like tomorrow or Wednesday at a price of 1937.67.It’s just a little unclear whether to start the harmonic grid at the Aug 24 or Sep 29 lows.

UPDATE:  9:41 AM

USDJPY decided not to come to the rescue just yet.  Back to the short side for a test of 2000, 1993, 1985 and then 1965.34. UPDATE:  9:46 AM

Just reached 2000.  I think they’ll try to defend it, as USDJPY is ramping again.  I’d go back to cash or long with very tight stops ONLY IF USDJPY RETAKES THE TL.Note that CL is rebounding strongly.  I expect it to top Sunday’s highs in order to put a floor under stocks here. And, as I was typing that, USDJPY popped back above the white TL.  Watch both of them closely.  If USDJPY doesn’t hold the TL and/or CL doesn’t make new highs, the bounce will quickly die.

UPDATE:  9:55 AM

I’d take profits on the bounce and go to cash.  At this point, we’re likely to get a lot of chop. UPDATE:  10:15 AM

I’m going to bow out and get on with the fun stuff I had planned for today (charting.)  Still like 1965, but will obviously need CL and USDJPY to cooperate.  Right now, they’re in position to help, but haven’t broken out — meaning that more downside is on the way, but they want it to be less frenzied than before. If USDJPY breaks above the purple channel, white TL and white .786 Fib line, then SPX should get the all-clear and probably (at least) backtest the SMA100 at 2024.63.  Otherwise, I’d be quite happy short for those downside targets or in cash.

UPDATE:  11:08 AM

Slipping back in here for a second to point out that CL just reached the TL from mid-December as SPX is nearing our 1985 target.  If you went short again (as I hope you did) with USDJPY’s retreat from the .786 Fib, 1985-1987 is an important level of support.  It’s the bottom of the Flag Pattern we charted a couple of weeks ago.  A drop through its bottom virtually guarantees 1965. UPDATE:  11:41 AM

That last bounce looks a little premature.  I’d say we have one more leg lower and would be comfortable shorting here for 1985 as long as USDJPY and/or CL pause or reverse here.CL is already there, but USDJPY could provide more help with another dip. UPDATE:  2:48 PM

Three hours later, and not much development other than the small channel off this morning’s lows was broken.  At this point, I’d say there’s a 50:50 shot at the other leg down to the Flag bottom happening.  It looks like 1985.17 or so if it happens at the close. Neither CL nor USDJPY has broken out. Pretty easy call to stay short as long as SPX remains below its SMA10 — currently about 2000.52.  And, no matter how bearish it’s looking, I’d close the short out by the close.  As much as I like the 1965 target, I wouldn’t be comfortable holding short overnight.

UPDATE:  3:34 PM

SPX just popped up through the SMA10 on some good, old-fashioned VIX smashing.  I’d watch it closely in here — especially for a sudden spike in CL or USDJPY, which are still marginally bearishly aligned.  I’d close out the short position on any sustained move through the SMA20 (about 1998.77.) UPDATE:  3:57 PM

That was quite a spurt through the SMA20 up to the SMA100 — all VIX, with a little help from CL.  I’d go long on any push through 2011, but with stops right at 2011.  But, I’d be in cash overnight. UPDATE:  4:02 PM

Almost reached the daily SMA100 at the close, just needed a few more minutes.  Back to cash at the close here at 2012.94 for a pretty decent day.