Over the past year, as headlines (if not reality) began to support the narrative of an improving economy, the Fed found itself in a position where they needed to either raise interest rates or change the narrative.  With over $18 trillion in debt, raising rates is not an option.

Crashing oil prices and a soaring dollar was the only solution [see: Those Wacky Central Bankers] that enabled them to keep both interest rates and inflation under control while preserving the yen carry trade.

But, there was a limit.  If oil prices got too low, the damage to banks who are heavily exposed to the industry would be too great.  And, the dollar was also getting to the point where even Yellen admitted it might be problematic.

The chart below shows the relationship between crude light (red) and the US dollar (purple) over the years.  It has historically shown a strong inverse correlation.

Yesterday’s fedspeak and market manipulation were designed to stabilize oil, the dollar and interest rates — all in one.  And, things were going pretty much according to plan — until the algos got a little out of control.  Actually, make that a lot out of control.

In the process of levitating stocks (to illustrate how wise and beneficial the Fed’s actions were) they forgot to put a lid on oil. Having already bottomed out as we expected two days ago [see: Update on Oil Mar 17] CL popped up through the trend line from 1998, threatening to undo all that nifty price control that got it down to an acceptable level in the first place.

This presented a quandary to the guys pulling the levers and pushing the buttons: how to kill off oil’s rally without also killing stocks?  Because oil and the dollar are so strongly inversely correlated, they needed to quickly ramp up the dollar.

But, the dollar and stocks have been strongly positively correlated lately.  Oil’s occasional ramp jobs have been a big part of algo trading ever since CL first stabilized in January.  So, ramping the dollar would add fuel to stocks and, hence, also oil.

The only solution was to use the yen to bring SPX and, thus, CL back under control.  As we wrote at 3:20 in the members section:

Gotta crash USDJPY (at least until after the close when it can all be reset.)  Maybe CL can be hammered back down then, too.

A cratering yen has been critical to the all-important carry trade which has fueled most of stocks’ rise since 2012.  The movement of USDJPY is the single most important contributor to stock price swings on not only a daily basis, but moment-to-moment as well.  We document its very high positive correlation with SPX on these pages almost every day.

Since mid-January, USDJPY has been advancing within a broad, white channel.  Together with CL (in purple below), is has driven SPX to all-time highs.

In mid-February, when stocks were faltering, USDJPY began constructing a new, steeper channel within the white channel (in gray, above.)  In fact, just two days ago (Mar 17), USDJPY broke out of a perfect little falling red channel above in order to arrest stocks’ sharp decline that day.

By crushing USDJPY (stronger yen, weaker dollar) they could bring stocks and oil back down.  It would mean also crashing the dollar which, as we mentioned above, generally benefits oil.  But, if executed correctly, it would have the necessary effect.

That gray channel had to go — but, preferably in such a way that stocks’ rally wouldn’t suffer any irreparable damage.  The key was timing.

USDJPY had dropped through the gray channel bottom the night before, and the white channel midline shortly after the session opened.  It bounced back above it as Yellen started her double-talk; but, when CL spiked through its overhead resistance, USDJPY was decisively crushed.

It had an immediate effect on stocks, which had just backtested the broken purple channel as we had expected.  We posted the chart below in Tuesday morning’s members section, along with the commentary:

Assuming SPX can get past the SMA20, the midline also intersects with the broken purple channel bottom for a backtest Thursday morning at the red .786 at 2102.49 (or next Tuesday the 24th at the .886 at 2110.48.)

The algos ramped SPX up to 2102 (where we recommended taking profits) and then some.  It had reached 2106.85 before the USDJPY crash finally caught its attention.  It backed off to 2096 by the closing bell, and was threatening more — especially, given the carnage going on with USDJPY, which had just dropped below a critical Fib line.

The white arrow on the USDJPY chart below marks the final 5 minutes of the session, when the pair dropped below 120.11 — the critical .618 Fib retracement of the pair’s decline from its 1998 high of 147 to its low of 75 in 2012.

This was a particularly bad omen for stocks, as previous dips below this line have led to large declines in SPX if they occur during market hours (after-hours, it’s easy to prop up ES in the much lighter volume.)

DX traders took note of the reversal and the crash in USDJPY.  If stocks were going to crater, they certainly didn’t intend to be left holding the bag.

The Fed was able to prop it up until the cash market closed at 4:00 (the white arrow below.  By then, it had fallen back to the purple channel top it had broken out of on Mar 10 (when USDJPY ramped higher to arrest SPX’s plunge.)

After the cash market closed, however, all bets were off.

Stunned by USDJPY’s continuing plunge (it didn’t bottom out until 4:04) and the likelihood that stocks would follow suit, the dollar flash crashed.  It plunged through our initial target at 98.82 and even through our primary target at 96.17 [see: Update on the Dollar Mar 13].

Finally, when it had reached the February lows, the Fed pulled out all the stops to support it.  It bottomed at 4:06, two minutes after USDJPY.  That it miraculously recovered overnight and is now pushing above the purple channel top again (in order to arrest this morning’s sell-off) is no coincidence.

That the USDJPY found support at the white channel bottom is not a coincidence. That EURUSD briefly popped above the midline of a 12-year old channel is not a coincidence.  That CL is suddenly back below the long-term trend line from 1998 (yes, hammered back down overnight) is most definitely not a coincidence.

In fact, there is very little in the way of coincidences in the “market” anymore.  Most of the time, the day-to-day moves are carefully scripted by central banks and the algos and HFT traders that capitalize on their continuing largesse.

The folks writing the script may tell us to pay no attention to “those algos behind the curtain.”  But, as events such as Black Monday, the LTCM debacle, the 2010 Flash Crash and the 2011 US credit downgrade taught us, they are a dangerous and destructive force that is always present — just waiting for the right conditions.

So, every once in a while — particularly when narratives need changing or correlations need resetting — things will get out of control.  As human beings increasingly yield the trading floor to machines, we believe the resulting lower volume and lack of rationale oversight will result in more such events.

Good luck to all.

 

 

About an hour before the cash markets opened yesterday, we observed that crude light was closing in on our long-held 42.51 target.  It bounced at 42.63 and was on its way higher when stocks opened trading, prompting us to write:

The bounce has begun, even though CL came up a few cents shy of 42.51. Stops are advised, as a premature bounce sometimes means one last leg down.

We also noted how much of CL’s decline had been conducted in the after-hours, so as not to disturb stocks’ continuing rally.  Guess what?

CL did post another leg down.  And, it happened right after the close — passing through 42.51 in the very minute before the futures also closed.  The 60-min chart:

We also noted as the market opened that USDJPY had dipped below the gray channel bottom for the first time since Feb 26.  The degree to which is was allowed to reset would depend on how stocks reacted to CL’s decline and subsequent bounce.

A strong response would allow USDJPY to decline during market hours; a weak or lackluster response would require it to wait until tonight or, as we discussed yesterday, a reaction to the Fed’s statement tomorrow.

Stocks started to falter, so USDJPY was brought right back into the gray channel — and, the falling red channel was broken — for the remainder of the cash session.  USDJPY was not allowed to decline to the white channel midline until after stocks had closed for the day.

If the above aren’t grounds for suspicion (if not proof) that these are the most heavily manipulated markets in memory, how about VIX’s actions this morning?

A 4-point SPX decline in the opening minutes was enough to prompt the Fed’s traders to push the panic button, sending VIX plunging from yesterday’s 15.96 close to 13.69 in the first three minutes of “trading.”

It broke the perfect little rising red channel, sending a loud and clear message that significant declines would not be tolerated.  Not today, with the Fed release coming up at 2pm.

Oil’s decline has been a godsend for the Fed, which has been struggling to find a way to keep inflation and thus interest rates low in the face of improving headlines.  But, it isn’t without repercussions.

The very banks whose bidding the Fed does on a daily basis are rather exposed to oil’s fortunes.  So, we rather expect that CL has reached a sweet spot and, like USDJPY, EURUSD, VIX, ZN, etc., will be utilized when needed to nudge the “market” in one direction or the other.

For more, see yesterday’s Update on Oil.  And, for how it fits in with the bigger picture including currencies, interest rates and inflation, see Those Wacky Central Bankers.

This being a FOMC announcement and press conference day, we don’t advise trading.  SPX typically follows a pattern of consolidation, putting in a triangle of some sort before a very brief and sharp correction, which is then followed by aggressive USDJPY ramping and VIX monkey-hammering that erases all losses and leaves it higher for the day.

But, as we’ve already seen, there is a great deal of manipulation that occurs on these days.  That doesn’t mean, however, that we won’t offer some thoughts on likely moves.

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With CL pennies from reaching our price objective [see: Update on Oil, Mar 17] this morning……USDJPY should have a chance to reset.  It has already begun, with the first (tiny) slip beneath the gray channel bottom since Feb 26.

Whether it completes a backtest of the .618 Fib at 120.11 will be determined by how well equities respond to oil’s bounce or lack thereof.

A strong response would allow USDJPY to decline during market hours; a weak or lackluster response would require it to wait until tonight or, as we discussed yesterday, a reaction to the Fed’s statement tomorrow.

UPDATE:  9:40 AM

The bounce has begun, even though CL came up a few cents shy of 42.51. Stops are advised, as a premature bounce sometimes means one last leg down.

The optimal timing for USDJPY to reach 120.11 and CL to reach 46 would be around midnight tonight (EDT.)  But, we’ll have to wait and see what TPTB have in mind, and how the “market” responds.Bulls should try to hold the line for SPX at the SMA10 of 2070.58.

UPDATE:  10:15 AM

The SMA10 is hanging on.  Note this is also the .786 channel line of the large rising white channel.  It was backtested on Mar 12, but broken in yesterday’s ramp job.

Forecast coming up.

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Note the gray channel I’ve added in the mix.  I don’t expect this to hold, but we might find it a useful reference point in terms of the scenario that’s being suggested.  The bottom overlays the TL from mid-October, and I’ve placed the top such that the midline captures several past reversals.

Assuming SPX can get past the SMA20, the midline also intersects with the broken purple channel bottom for a backtest Thursday morning at the red .786 (or next Tuesday the 24th at the .886 at 2110.48.)

The downside case (yes, there still is one) remains the white .618 at 2033.  The move up from 2039 to 2080 did avoid completing the H&S Pattern.  But, it also might have constructed a 4th wave of a 5-wave 61.8% retracement from 2124.

Remember how we commented about VIX being a good indicator of what they really have in mind?  And, how the small red channel’s breakdown yesterday might be a head fake?  Check it out this morning:

All of the above is pure conjecture, and will  of course depend on whether oil really did hit bottom this morning and what the FOMC tells us tomorrow.

Personally, I don’t expect a rate increase or a promise of a rate increase — for reasons that we’ve discussed many times.  The US can’t afford one any more than it can afford a higher dollar.

UPDATE:  2:25 PM

All I can say is “wow!”   The TPTB are so terrified that the “market” won’t be able to hold its own that they had to once again ramp USDJPY up out of the obvious direction it was heading.

Or, perhaps the brief breakdown through the gray channel bottom was just a head-fake.  I don’t know.  All I know is they succeeded in pushing SPX back above the SMA10.

In light of this development, it’s worth noting that SPX is 7 points away from completing an IH&S (at 2080.80) that targets 2124.14.  If that’s the next stop, the rising white channel below would reach the yellow dot tomorrow morning and the red dot Friday morning.  The purple dot looks more like Monday morning.

VIX’s earlier promising signal has petered out, falling back out of the rising red channel at this time…

…as CL dips below the TL off this morning’s lows.  With an hour to go, will we have a repeat of yesterday’s ramp job transitioning into an after-hours reset?  Or, maybe a breakdown in the final hour to actually tag 42.51?  Stay tuned.

UPDATE:  3:15 PM

Here’s a better look at the SPX chart showing the 2124 IH&S target.  Note that it would just about tag the rising white channel top at the purple 1.272. 

This was the target back on Feb 25.  It looked awfully darn certain until the euro decided to collapse.  The white arrow below corresponds with SPX’s 2119.59 top.

UPDATE:  5:40 PM

Lovely…

Crude light (CL) is about to tag our 42.51 target — completing a Bat Pattern at the 88.6% retracement of the rise from 33.20 in Jan 2009 to the peak of 114.83 in May 2011.  We’re looking for a significant bounce.

Close-up on the 60-min chart:

In our last dedicated update [see: Jan 6 Update] we noted the trend line connecting the Dec 12, 1998 and Jan 15, 2009 lows:

We discussed the bleak channel and TL standpoint.  From a price Fibonacci standpoint, the next major support is another 13% lower — the white .886 at 41.49 [note: now 42.51 due to price adjustments for contract changes.]

Since CL broke through the trend line a few days ago, we have been expecting this drop.  Also as expected, it occurred during the after-hours (lighter color in the chart below), so as not to upset equity markets which are much more easily propped up in light volume.

As we discussed about a week ago [see: Those Wacky Central Bankers,] oil’s massive price decline is both a reflection of and perfectly suits the US’ needs:

– strong dollar
– low inflation
– low interest rates
– continuation of the yen carry trade
– penalties for our “enemies”

In fact, oil’s decline was quite possibly the only major economic event which could have satisfied all of those critical needs — leading me to believe it was a deliberate take-down.

From a chart pattern standpoint, failure of a 17-year trend line is a big deal.  But, so is completion of a Bat Pattern.

So, it’s going to be very interesting to see whether oil will rebound here as it normally would for technical reasons or continue to fall (or, at least flatline) because that’s the corner into which central banks have painted us.

My gut tells me we’ll get a decent bounce that boosts stocks and allows USDJPY to reset (or, at least backtests the .618 at 120.11.)  A typical bounce after completing a Bat Pattern would be to the .618 Fib which, in this case, is 64.38 — so, we’ll put a pin in it. Though, that high a bounce could undo many of the benefits from this latest plunge.

Stay tuned.

The big story in the markets overnight is crude’s near collapse below the trend line from 1998 to test its Feb lows.

The long-term chart:

But, USDJPY came to the rescue yet again, popping up to test (5th time) the falling red TL upper bound with a threatened breakout…

…and sending ES scurrying higher overnight.  It’s currently showing a 12.75 gain and backtesting the .382.

The stage is set for SPX to pop and drop. But, the ramp job should get it up over the SMA50 at 2059.27 in the opening minutes.  So, it’ll be interesting to see whether it takes the bait.

Note that USDJPY has backed off the channel top, and is signalling a retest of the white channel midline or lower — but, not until it’s done providing cover for oil

It now appears more likely that the backtest of the yellow .618 at 120.11 might wait until Wednesday — perhaps as the initial kneejerk reaction to the Fed announcement.

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In October 2013, after the dollar had reached our long-held 79.60 target, we naively opined:

The dollar finally reached our 79.60 target [see: Sep 20 Update] overnight and should see a bit of a technical bounce here at a large scale .886 (white) and medium scale 1.618 (purple.)

It wasn’t a completely ridiculous call — just naive.  DX had recently broken down through a long-term channel bottom (red below) and an even longer-term channel midline (in white.)

We observed that a declining dollar in the US — a net importer — usually leads to an increase in CPI.  This was troubling, as it seemed the dollar was due to fall further at a time when inflation had already bounced off long-term lows.

I suppose someone in the central planning control room was thinking the same thing.  Because, they put a floor (dashed yellow line) under the dollar right then and there.

The yen plummeted from 100 to 122 to the dollar (its high earlier this week) and the euro plummeted from 1.39 to about 1.05 USD.

As we discussed yesterday [see: Those Wacky Central Bankers] this was not a random occurrence.  Along with oil’s take down, it was a carefully orchestrated exercise that — among other goals — would shift inflation from the US (which wasn’t prepared for it) to Japan and the eurozone.

By keeping inflation under control, interest rates could also be kept at a manageable level — an important issue when a return to historical norms would triple the country’s annual debt service.

Equally important, a plunging yen would keep the yen carry trade alive and stock prices on an upward slope. For details on the BOJs role in inflating markets, see: Invasion of the Market Snatchers — a 3-part series which began today.

Nothing lasts forever, as they say.  And, the dollar is approaching its next major hurdle.

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When we last examined EURUSD [see: Jan 23 update] it had just reached our Dec 3 target at the .618 Fib level of 1.12.

We were looking for a bounce, but its magnitude was a big question mark.

The degree of any technical bounce is a bit tricky.  It would take a lot of short covering to effect a meaningful retracement.  After all, the ECB is officially trashing the euro to the tune of 1 trillion bucks.

The widely held expectation is that the Fed will “soon” be raising US interest rates, and therefore strengthening the USD — a viewpoint we don’t share, by the way.  If we’re right, and US rates remain low or trend even lower, this will put pressure on the dollar and, in return, strengthen EURUSD.

We speculated about whether our next downside target of .9898 might not arrive until later in the year, and left readers with the admonition:

Keep an eye on this critical support here at 1.1210.

That support has since been crushed underfoot by the thundering herd scrambling for the exits.  The bounce off the .618 never got above 1.1533 and lasted only 22 sessions.

What’s worse, it now’s now in danger of losing all support all-together.  continued for members... (more…)

The Wall Street Journal recently reported that, over the past two years, the Bank of Japan has purchased stocks on 96% of the days when the market opened lower or closed lower after initially opening higher.  In this two-part series, we’ll pick up where the Journal left off and examine how this activity by the BOJ — now the single biggest owner of Japanese stocks — has led to a bigger stock market bubble than in 2000 or 2007.

*  *  *  *  *

What do you call it when it looks like a market, walks like a market, sometimes even quacks like a market… but it’s not like any market ever before seen on this earth?

One of the more interesting articles I’ve seen in quite a while is this Wall Street Journal article published Wednesday that discusses how, for the past five years, the Bank of Japan has been — and, you should probably sit down for this — manipulating the markets!   I know, I know.  Shocking, right?

This is hardly news to pebblewriter members.  We’ve lamented it ad nauseum for years.  But, the article caught my eye because it’s one of those rare few mainstream media articles that openly discusses a practice which many investors regard as conspiracy theorist delusions.

The Prologue

The BOJ first obtained approval to buy ETFs and REITs back in 2010.  Like the S&P 500, the Nikkei 225 had tumbled about 60% during the crash.  Unlike SPX, which didn’t bottom out until March 2009, NKD hit bottom (7425) in October 2008.  And, in a remarkable coincidence, again in March 2009 (yes, exactly 7425.)

Also unlike SPX — which regained a Fibonacci 61.8% of its losses by April 2010 — NKD regained only 38.2% (also a Fib) of its losses.  On the way to there, it dipped to 9490 — not once, but twice.

So, when it dipped a third time (yes, to exactly 9490) it set up what we chartists call a Head & Shoulder Pattern.  The chart below shows each of the two shoulders marked with a red “S” and head with an “H.”

The only thing necessary to complete the pattern was a substantial bounce and a subsequent drop below that dashed red line (the “neckline”) at 9490 — which was delivered on August 24, 2010.

The completed pattern targeted 7095 — a huge 25% decline.  The Japanese needed a 25% correction like they needed a 9.0 earthquake.

Enter the Bank of Japan, which had plenty of experience with quantitative easing (QE) of the government bond buying and currency manipulation variety.  Maybe, just maybe, they could help out on the stock market front as well.  From the WSJ:

BOJ officials used to be cautious about purchasing ETFs, worried that it could distort market activities and put the central bank’s own financial health at risk.  But, under pressure from politicians following the global financial crisis, the bank changed its stance in late 2010.

“We led the cows to water, but they didn’t drink it, even though we told them it tasted good,” Miyako Suda, who was a board member then, wrote in a a 2014 book discussing monetary easing at that time.  “So we thought we should drink it ourselves, showing them it was tasty.”

The BOJ rushed through a plan to purchase ¥76 trillion (then, about $1 trillion USD) in “tasty” financial assets that included ETFs and REITs.  From the Principle Terms and Conditions:

The rumors that the BOJ would actually be buying stocks — trillions of yen in stocks — were, alone, enough to send the Nikkei scampering back above that neckline.  By the time the program was actually instituted, NKD put 9490 in its rear view mirror for good.

Or, so everyone thought.

next: the pods open…

 

SPX broke out of the falling white channel yesterday… …largely on the back of USDJPY, which rallied sharply…

…to offset CL, which tumbled to our target — in the after-hours, of course.  When it comes to manipulating prices higher, it’s important to backfill at night, when the e-mini volume is light enough to prop it up cheaply.

Now that the cash markets are open, let the spoofing begin!

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SPX reached the SMA100 yesterday, less than six points from our target of 2033.88 — but, couldn’t quite punch through.  The target remains unchanged from Mar 4.

We’re watching to see whether or not the overnight ramp job can hold, with futures currently up about 7.50.  USDJPY is being rather coy — bouncing off the easy initial red TL support after reaching our first downside target: the white channel midline.  Had it happened during trading hours, SPX would have bagged 2033 by now.  We’re still looking for 120.11.And, CL — which reached our 47.66 target yesterday — is back in the rising purple channel (for now.)  If it’s going to break down and tag our 45.86 target, today really is the day.

The two most interesting charts are DX and EURUSD.  Both are showing a bit of a reversal, which — when it occurs for real — will be the biggest potential game changer around.

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