updated Nov 16, 2016:

One of my favorite Bushisms hails from 2005, when W. was extolling the merits of having Wall Street individuals manage their own social security funds.

“See, in my line of work you got to keep repeating things over and over and over again for the truth to sink in, to kinda catapult the propaganda.”

In many ways, the Dow chart is Wall Street’s version of repeating things over and over again until “the truth” sets in, an attempt to catapult the propaganda that everything is awesome.

The huge megaphone pattern that set up beginning in 1998 should have led to a reversal in late 2013 as it did in 2007.

2016-05-15 DJI wkly megCharted, instead, as a long-term channel, the same outcome was indicated.  DJIA should have reversed at the channel top.

2016-05-15 DJI wkly chnl Ditto for the Fibonacci contingent: a well-defined Butterfly Pattern indicated a reversal at the 1.272 extension of 16,300 just like it did for the channel and megaphone patterns.2016-05-15 DJI FibYet, it somehow defied all those time-tested patterns, pushed above all that resistance and went on to register new highs — even after the rising wedge (in purple) broke down.

It wasn’t a total surprise, given that the Dow’s meager 30 issues makes it an easy mark for spoofing and other price manipulation techniques.  It commonly overshoots upside targets and undershoots downside targets.

But, the real story was the yen carry trade — the single most powerful influence on stock prices between 2011 and 2015.  For those who are unfamiliar, here’s the general premise:

Yen Carry Trade PictureI know of no better proof of its influence than the DJIA.  The yen carry trade was instrumental in each of DJIA’s efforts to break above the top of the red channel and megaphone top.  Skeptics, be prepared to see things in a whole new light.

In the DJIA chart below, we see a close-up of the red channel top.  Each of the significant spikes up through what should have been heavy resistance, and drops back below, are numbered for reference purposes.2016-05-15 DJIA CUThe chart below shows the corresponding period in the USDJPY.  Remember, a higher USDJPY means a lower yen, which — thanks to the yen carry trade — drives stocks higher.

2016-05-15 USDJPY CU numbered

1.   DJIA’s first pop up through the channel top came as USDJPY simply backtested and bounced off its 200-day moving average, then popped above its 100-day MA.

2.  USDJPY popped above the .382 Fib which had precipitated its consolidating triangle.  This was the 5th attempt to clear the resistance since USDJPY bottomed in Oct 2011.

3.  Following the 10/31 surprise expansion of QQE, USDJPY rose above 120.11, the critical .618 retracement of its drop from  147 in 1998 to 75 in 2011.  This also represented two different channel tops for USDJPY.

4.  After reversing below 120.11, putting in two subsequent lower lows, USDJPY suddenly spiked back above it and made a new high.

5.  DJIA made a new all-time high with this return above 120.11 by USDJPY.  Note that USDJPY had just closed below its SMA100 for the first time in 7 months, a bearish development.

6.  USDJPY’s failure to make a new high and subsequent plunge below 120.11 was responsible for DJIA dropping through the red channel top, shedding over 16%.

7.  Almost immediately, USDJPY pushed back up through 120.11.  It criss-crossed the critical Fib level an incredible 30 out of the next 36 sessions.  It typically rallied higher during market hours (when stocks were subject to its influence) and reset after markets closed (in order to rally again the following day.)  It finally pushed through strongly on the day that DJIA needed to gap above its own critical .618 Fib.

8.  The second drop through 120.11 was almost as traumatic for DJIA.  It shed only 14% this time.  Not so coincidentally, it bottomed slightly higher than in August, which was slightly higher than in Feb 2014.  When it fell back a couple of weeks later, it was another higher low.

This post didn’t start out as a study on the effects of the yen carry trade.  And, it won’t end on that note either.  In fact, the USDJPY has become a bit player in the effort to catapult the propaganda.  The chart below shows that USDJPY was no help at all in the rally which began on Feb 11.2016-05-15 USDJPY v DJIARegular readers will recognize Feb 11 as the day oil bottomed — right on cue, in fact [see: USDJPY Finally Relents.] A subsequent 80% rally in the past three months — the sharpest since 2009, after stocks had finally bottomed out — has produced a 17.6% rally in DJIA.

2016-05-15 CL v DJIA CUNot so coincidentally, it has propelled DJIA back above the red channel line.  CL is playing the game exactly as USDJPY did, with spikes above obvious resistance — such as the long-term channel bottom it broke below in January — signaling the algos it’s time for DJIA to also spike higher.2016-05-15 CL v DJIA LT With DJIA having dropped back to the red channel line on Friday, is it any wonder CL has spiked over 3% to new highs this morning?  Don’t bother looking for news in the oil complex.  The “news” is that DJIA has reached another critical point where, much like #8 in the chart up above, one false move could mean another plunge.

CL’s latest spike is good news if you have a large stock portfolio and don’t mind spending more at the pump than you used to.  If you’re barely getting by and can’t afford to trade up to a Prius, not so much.

UPDATE:  Oct 14, 2016

The silliness continues.  DJIA not only pushed above the purple channel top, but the red one as well — backtesting it and a TL from Feb 11 (in yellow below) on Sep 12.  2016-10-14-dji-daily-0815Interestingly, that TL started breaking down on Sep 26.  As late as Oct 10, it was still backtesting it.  Yesterday’s low dipped below Sep 12’s, and backtested the broken red channel top again.2016-10-14-dji-daily-cu-0820Breaking down through a long-term trend line like this would normally be considered quite bearish.  But, of course, DJIA has a long history of making new highs after breakdowns — witness the post-Brexit rally in late June and July.

What, then, should we read into it?  The SMA200 is currently at 17643 – just below the rising red channel top that DJIA first reached on Dec 30, 2013.  I suspect that backtesting the SMA200 and the rising red channel in one fell swoop will be too much for DJIA to resist.2016-10-14-dji-wkly-1125In other words, it confirms our view of the “market” facing more downside over the next month or two — though it might be delayed by the upcoming election.

Updated: Nov 16, 2016

In May of 2015, SPX completed a huge Butterfly Pattern set up by the 57% drop between 2007 and 2009.  It helped us call an important top [see: The Last Big Butterfly] and made for some pretty profitable shorting opportunities.

Since then, as TPTB wrestled with a way to get SPX back above 2138, the Dow slowly worked its way higher.  Just Monday, it came within 40 points of completing its own Butterfly Pattern for the same time period.

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