Investors are on edge, waiting for insight from the Fed’s July meeting regarding the upcoming taper.

The dollar has seemingly bottomed…

A close-up:

And, the USDJPY has broken out of its falling purple channel and should retest the white channel this morning.

I’m looking for yesterday’s target to be hit prior to a reversal.  Shorting on the opening and looking for 1648-1650ish.

UPDATE:  9:33 AM

That should do it for the downside — a little past the .886 and tagging the grey midline.  Going long here at 1647, stops at 1646.

As we discussed yesterday afternoon, a strong reversal here could set up a nice IH&S Pattern (red) targeting 1670-1672.

But, it will all come down to the July Fed minutes, due out at 1:00 PM.

Treasuries are doing their part, backing off the 3.00% mark — albeit due to OMO.

Is it engineered?  Of course.

Will it work?  Probably.

Will it blow up some day?  Undoubtedly.

But, for now, the markets are willing to ignore who’s doing the buying as long as someone is buying.  We’ve seen this over and over again with the countless interventions.

Call it PPT, call it TPTB, it doesn’t much matter.  The banks have hundreds of trillions in interest rate swaps that could sink them in a heartbeat if: (1) interest rates were to soar, and (2) they were ever required to mark their contracts to market.

The Fed, with the budget to monetize virtually all Tsy issues (and enough of the open market sales), knows this and is buying time — hoping the worst offenders can get their houses in order before things get out of hand.

As long as they have the ability to keep things from getting out of hand, they will.  And, as long as the MSM plays along, they probably can.  Markets are like elections.  The hard core bulls and bears are unlikely to ever change.  It’s the undecided folks in the middle who decide the winners and losers.

When an avalanche of sell orders floods the market, we get crashes — uncontrolled events like May 2008 and August 2011.  We’ll know one’s happening when volume spikes, channels fail, patterns bust and prior lows don’t hold.

Most of the time, however, we get mild corrections that satisfy the bears and don’t freak out the bulls.  To a chartist, they appear as channels being fleshed out. That’s what we’re facing now, though careless wording in the Fed minutes could easily change things.

continued for members…So, the purpose of the chart below isn’t to suggest it will happen.  It’s merely to suggest that it could happen.  And, if the message we get later today is positive enough, it’s not all that unlikely from a charting standpoint.

The close up:

UPDATE:  11:39 AM

Stopped out on the long position at 1646, reverting to short.  Next support is at 1635-1638, stops at 1646ish.

While this clearly changes the makeup of any potential IH&S (new head here?) it doesn’t change the odds of the scenario discussed earlier playing out.  The key is whether SPX puts in a hard reversal after the minutes are released — not whether the bottom is 1646 or 1638.

UPDATE:  1:40 PM

SPX continues inching up in a rising wedge since sliding through our 1646 stop.  At this rate, it’ll be around 1649-1650 in 20 minutes when the announcement comes.  I’ll continue to hold long, but with trailing stops about 2pts below.

UPDATE:  1:54 PM

Just a reminder of the downside case…shown here in ES.

Here’s the SPX 5 min chart.  Ready to break down or break out.

The dollar:

UPDATE:  2:00 PM

Stopping out at 1646.86, going short in search of 1635-1638.   Stops at 1649.

Gold is selling off mildly but still above the lows. USDJPY breaking out?

DX holding strength.

Will try a long position here at 1640.  Need a break of 1649, stops at 1640.  Caution, though, as 1638.72 and 1635 are still on the table.

Yields are hanging in there — a lower high so far.

And, the eminis look like they’ve bottomed.

UPDATE:  2:38 PM

Getting a nice rally going here, up past the red channel midline.  The initial thrust should reach the white .886 or a little higher.  1658 would tag the red dashed neckline of the new potential IH&S pattern.

A match to the left shoulder would mean 1644, but I suspect the grey midline at 1648 will be good enough.  If it plays out, this pattern would target 1676.

UPDATE:  2:49 PM

There’s the .886 — good enough for me and s/b good enough for the right shoulder.   Going short here, targeting 1648 and stops at 1659.  Updated charts in a minute.

Should get a pullback to the red midline here.  The bullish case is shown below:

Extrapolating the bullish case, we could be back to 1700-1705 by Fri -Tues.

UPDATE:  3:24 PM

This was faster than I expected.  Not quite as deep, but looks like a better spot.  Going long here at 1651.37, stops at 1649.

A quick peek at gold, which looks positive here.

The daily RSI chart looks very bullish, with a potential roadblock at 1395 (the purple channel) depending on how you draw it.

If GC can get past that level, I think we’re looking at 1550-1574 in the next 2-3 weeks.

The bullish RSI picture…

and, the bullish-er picture:

UPDATE:  3:39 PM

SPX just poked down through 1649, but I’m holding tight to my long position and will add an interim short position for protective purposes.  Target 1643ish.

UPDATE:  3:55 PM

Covering the short here at the close — hopefully 1642.  Will plan on leaving the full long position overnight unless it breaks down through 1639.43.

EOD:  Full long at 1642.36 — just shy of .886 at 1641.43.   Will post more later.

UPDATE:  3:00 AM

The eminis have recovered their losses from earlier in the day (were down 5 after the cash markets close.)  This brings them back above the grey midline, a key element of support, and the purple channel bottom.  Otherwise, I don’t see any changes overnight.  We’ll see how things shake out in a few hours.

The US dollar continues to attract buyers.