If yesterday was your idea of fun, you’ll probably love today.  When USDJPY tested the red channel midline and SMA200 after the BoJ’s underwhelming NIRP action, we forecast the next move would be lower.  And, it has been.  Last night, it dropped back below the SMA100, too.

There are numerous fundamental reasons why this might be the case.  But, since the USDJPY usually trades where the BoJ wants it to, the real reason is because they want to backtest the critical Fib at 120.11 (dashed, yellow line.)  Any potential decline should be defended there.  And, any further advance should be launched by one last backtest.The key, for the bulls, is accomplishing the 1.57 decline without too much disruption to the equity markets. Yesterday, it meant an inexplicable rally after the initial sell-off in the opening hour.  Will they permit the rest of the decline today?

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I think the most likely scenario is we get another day today like yesterday, with an initial dip that is bought — perhaps to excess — and, another one either late in the day or on Wednesday to allow USDJPY’s final decline to 120.11.

One word of caution: the final 120.11 tag and a big bounce could easily come overnight.  The BoJ is well aware of how important it is, and might take such action to limit the fallout.  In my estimation, it’s no time to be bold and take big, unhedged positions overnight.

ES is currently down big, but should be supported by the white channel bottom and the SMA20 (1906.46) that it couldn’t bring itself to tag yesterday when it was several points higher.It should be enough to allow SPX to backtest its daily SMA20 at 1919.64.  Should it slip below, then a backtest of the white channel midline (1912ish) and the purple IH&S neckline (1907ish) would be the next areas of support.  So, by all means, start out short, but be prepared to switch to long fairly quickly.Note that if it’s unable to reach the SMA20 in the opening hour, it has a somewhat more clear shot at the close, when a (red) TL off the Jan 20 lows catches up.  As always, keep an eye on CL and NKD for signs of TPTB’s intent. BTW, I have to leave very early today — about 12PM EST.  I’ll post up until then, but won’t be back until after the close.

UPDATE:  9:39 AM

ES just tagged its SMA20, too.  Switching to cash here at 1914.81.  The white midline is just below at 1912, but the neckline is down around 1907.  If the channel midline is broken, might be worth getting back in for those other few points. UPDATE:  9:44 AM

ES bouncing back above its SMA20, so back to long here for a bounce up to 1919.  Very tight stops in case it’s not quite done. UPDATE:  9:47 AM

Back to cash on additional weakness.  We’ll wait for a push back through on strong USDJPY, NKD or CL support.  I suspect the neckline is the ultimate target.USDJPY has reached the bottom of its falling red channel.  It’s close enough to go ahead and dip to 120.11 if they want to make sure SPX tags its neckline now.  It’ll only be further away later in the day.I show the neckline currently at exactly 1907.7 and the red TL at 1905.9.  I have to step away for a few minutes, will be back at 10:10.

UPDATE: 10:10 AM

Not quite done with my call — will need another 10-15 minutes.  Look for SPX to reverse at the falling red SMA 5 10, now at 1915, and decline to the neckline at 1907.5ish.UPDATE:  10:45 AM

ES just tagged its SMA5 20, so both it and SPX should reverse.  But, SPX is just likely to pop up and tag the SMA5 20 currently at 1919.51.  Sidelines isn’t a terrible place to be right now. USDJPY already made one exploratory push toward 120.11.  It could do it again any second.And, CL is loitering below the rising white channel bottom, hinting at lower.Finally, NKD says lower prices are definitely in the works.  All in all, I’d look for a signs of a reversal when SPX hits the purple neckline.  But, I still have to consider the falling SMA5 20 a magnet for a potential bounce.

UPDATE:  11:10 AM

Decision time for SPX: reverse to neckline or continue up to test the SMA20 at 1919.64.  Watching USDJPY and NKD for clues…UPDATE:  11:30 AM

No additional clarity at this point, though most indicators are for a continued slow meltup.  The scenario discussed above is slightly more likely: a bounce continuing through the day or at least until the close — followed by another leg down into the close or tomorrow morning to accompany USDJPY 120.11.

I’m going to sign off now.  But, indications are for a backtest of the SMA20 at 1919.64.  If it breaks, then the SMA5 200 now at 1922.50 is next up (and, the other falling SMA5s) and, ultimately the white .786 line now at 1936.  Things are definitely feeling lethargic, though that could change depending on whether USDJPY tests 120.11, and what happens to it if/when it does.

I’ll check back in after the close.

UPDATE:  12:39 AM

The backtest of the SMA20 only got to 1918.6 before reversing back below and closing below the purple neckline.  It almost made it as low as the SMA10 at 1895.32, which could well set up tomorrow morning’s initial tag if today’s decline continues.  Technically, we have another potential IH&S to consider (in yellow, above.)  But, the neckline is way up at 1947, so we’ll mark it and forget about it, for now.  The immediate task is to get back above the broken purple neckline.

And, it’s no small task.  As I wrote earlier, a lot was riding on whether USDJPY would reach 120.11, and what it did after reaching it.  USDJPY not only reached it, but plunged below it and has continued to decline.  Though it has found TL support (red, dotted) it has lost the purple channel bottom.  If it doesn’t regain it — and 120.11 — by tomorrow stocks will sell off even more.

More in the morning.