The euromess continues to have everyone on edge. The genius of Mario Draghi is that he trashed the euro and took interest rates below zero without having to do much besides flapping his gums.

The idiocy of Mario Draghi is that the euro and eurozone interest rates have sunk so low, no one knows whether or how they’re going to stabilize now that QE has finally begun.

The global markets have risen to stratospheric heights on the back of dollar strength and yen/euro weakness, plain and simple. We’ll take a fresh look at the current state of the carry trade in the next few days.  But, even the White House admits that dollar strength is becoming a fundamental problem.

And, while some believe the yen will fall further (140 is tossed around quite a lot), there is increasing pushback by the Japanese consumer and businessman alike (see: HERE.)  If not for the plunge in the price of oil (which is trying to find support here, by the way) Japan would have way more inflation than it can manage.

Contrary to Abe’s fairy tale figures, overall inflation reached 4.4% last May, and has since backed off to 2.8% thanks to energy.  But, fresh food prices are up 15% since November. And if, as I suspect, oil has bottomed out for now, Japan Inc. will be hard pressed to flog the yen any further without deepening the death spiral in which it already finds itself.

We’ve speculated as to whether the ECB can (let alone should) accomplish the same results as the BOJ.  The eurozone has a definite deflation problem.  So, to the (very questionable) extent that QE could solve that problem, buying up €1.1 trillion in bonds might seem like a good thing.  The “markets” would certainly appreciate the injection of cash.

But, where to put €1.1 trillion?  As the research shows, there just aren’t enough attractive, eligible bonds laying around.  And many of them already feature negative yields.  Buying them at current prices already guarantees an investor will lose money.  Can the fractious eurozone support such an endeavor, especially when voters come to realize they won’t benefit one iota?

Then, there’s the dollar.  If the euro and the yen continue getting cheaper, it would obviously continue to rise in value.  US consumers are happy as clams pumping cheaper gas into their cheaper Toyotas and Mercedes. But, the handful of exporters still kicking in the US are hurting.

And, there’s that elephant in the room: how to take central bankers’ big, fat feet off the gas without reversing all those carry trades and crashing the global economy (along with stock markets everywhere?)

The last time oil prices plunged like this, stocks reflected the concurrent economic weakness.  This time, they haven’t — at least, not yet.

Is it because economic conditions aren’t all that bad, and the oil price decline is out of sync?  Or, perhaps the economy is in big trouble, as oil accurately reflects; and, stocks are being driven higher by unrelated factors.

We think the actual answer involves a little of each.  Let’s summarize:

JAPAN

1. Japan’s economy is circling the drain.  It has gone all-in on QQE in order to stay alive.
2. Japan’s plummeting yen has fueled the carry trade, driving stocks everywhere higher.
3. Japan’s plummeting yen was crippling consumers and businesses — until oil plunged.
4. The BOJ is officially monetizing the Japanese gov’t (and increasingly its stock “market.”)
5. If inflation remains under control, the yen could be trashed even further.

EUROZONE

1. The EZ’s economy is circling the drain.  It just instituted QE in order to stay alive.
2. The plunging euro has also helped fuel the carry trade.
3. The plunging euro has not impacted consumers yet — again, thanks to low oil prices.
4. The ECB is indirectly monetizing eurozone governments.
5. Deflation is a huge and real concern.

UNITED STATES

1. The US economy has seemed fine on the surface; in reality, it’s faltering badly.
2. The soaring dollar has helped fuel the carry trade.
3. The soaring dollar has helped consumers due to lower oil and other import prices.
4. The Fed has ended QE (for now), but has zero desire to see interest rates rise.
5. Inflation is under control (for now), but could soar if the dollar plunged in value.

 

How do all these factors explain the current state of affairs? Let’s put it all together.

The driving force is the US, which desperately needs inflation and interest rates to remain under control. Otherwise, the nation’s debt service payments would get out of hand, the bond bubble would burst and equities would plummet. It also needs consumers to increase borrowing and spending.

One key element is lower oil prices, which are largely a factor of a strong dollar and increased domestic production.

While oil and gas capital expenditures total about 10% of US CAPEX, they represent only about 1% of US GDP. In other words, the US can weather the price decline without much damage to the average American or to GDP (employment is another matter.)

Keeping oil prices low allows Japan to maintain its QQE and incentivizes the ECB to increase its QE — thus supporting the carry trade and continuing stock “market” expansion.  It also offers the side “benefit” of punishing Russia for its actions in the Ukraine.

If oil prices were to rise and/or the yen fall much further, Japan’s will to support the carry trade might falter.  The eurozone, on the other hand, is ostensibly open to higher oil prices in order to increase inflation.  It’s an idiotic bold experiment that is likely to end in failure as it did in Japan.  But, that’s a crisis the next crop of kleptocrats can deal with.

How about our Middle East “friends” and the good folks at Big Oil?  OPEC doesn’t seem too alarmed by falling oil prices.  It’s the (temporary) cost of stifling shale oil & gas production in the US, not to mention chipping away at ISIS oil revenues which have been estimated at $3 million/day.

And, Big Oil — while taking a beating on last quarter’s earnings — is likely licking its chops at the cheap reserves that will come available as more highly leveraged and less stable companies go belly up.  We wouldn’t be surprised if the majors were not only well aware of the decline, but helped orchestrate it, too.

So, yes (in case you were wondering), we suspect oil’s abrupt decline was scripted — engineered in order to meet the otherwise conflicting needs of the G7 for low interest rates, low inflation and rising stock prices in the face of a global economic slowdown.

Will it work? Absolutely! *

 

(* until it doesn’t)

 

 

SPX hit our purple target yesterday, bounced to the first level of resistance at the SMA50, and continued toward the red target.  The purple target was first suggested on Mar 4:

If the H&S should play out, it would target around 2060 — which is coincidentally (or not!) the SMA50 and might allow a backtest of the broken falling gray channel.

We added the red target on Mar 6 [see: Is Good News Good?]

The white dot (2062-2066) would suffice, but an actual tag would be down around the purple dot at 2057.   If that should fail, then the red dot at the white .618/SMA100 intersection (2033ish) makes a great deal of sense.

BTW, the white channel below is new, having been placed there to illustrate the proportion of the latest decline relative to the previous.  It’s a lame placement, but one that bulls might just latch on to (we know, never end a sentence with a preposition; but, doesn’t “a placement onto which bulls might just latch” sound silly?)

The futures are up about 5 points overnight due to the usual USDJPY antics.  Here, too, I’ve inserted a new channel.  The white one we’ve been using offered a well-defined top and midline and a messy bottom.

The purple one we’ve inserted is a bad fit, but one that the bulls will pray is legitimate.  The way the BOJ sees it, any chart pattern is fine as long as it targets the moon.

Since so much is riding on USDJPY, EURUSD and CL at the moment, this post is continued at: Those Wacky Central Bankers.  There, we’ll try to make some sense of the plunge in oil prices, the euro and the yen in light of central bank objectives.

Last Friday, we updated SPX’s price targets to reflect the completion of the H&S Pattern we had originally forecast back on March 4.

If the H&S should play out, it would target around 2060 — which is coincidentally (or not!) the SMA50 and might allow a backtest of the broken falling gray channel.

Ultimately, I think we’ll see backtest of the falling gray channel as we suggested last Wednesday.

With the e-minis off as much as 20 points earlier this morning, the stage is indeed set for our target — the SMA50 — to be tested.

As we discussed in yesterday’s members’ section:

…at this point I’d have to go with more downside before the big bounce gets started in earnest.  The SMA50 at 2062 would be a good starting point, though the gray channel backtest at 2055-2057 is more appealing.

From there, the “market’s” next moves might surprise a lot of traders.

continued for members… (more…)

Last week’s charting worked out well, with the H&S Pattern and price targets we forecast Wednesday Mar 4…

…playing out nicely by Friday.

USDJPY reached our 121.12 target a few days ahead of schedule — which, unless the previous high is at least tested, will leave it with little levitating power.

And, CL is showing few signs of being ready to reverse just yet.

Aside from the ECB’s QE finally starting, and a couple of Fed president’s speaking today, I don’t see a lot that could change Friday’s intermediate-term forecast.

continued for members… (more…)

Futures responded to this morning’s jobs numbers by promptly selling off…

Look for ES to complete the little H&S Pattern targeting 2052.  Whether it’ll be allowed to play out is another matter altogether.  USDJPY ramping is in full swing…

…with the pair approaching our upside target of 121.12 — the .886 retrace of the drop from the December highs.But, CL is falling off the wagon once again — seemingly on its way to tag 47.66.

Needless to say, the jobs picture is problematic for the FOMC.  Having balked at reducing market support when unemployment fell below 6.5% and then 6.0%, can they rationalize ZIRP at 5.5%?

Whether or not we think they should, they no doubt will.  Simply put, the US cannot afford higher rates.  With $18 trillion in debt, a mere 1% increase in rates translates to an extra $180 billion in annual interest payments.  That would increase interest payments as a share of annual government expenditures from the current 6% to 11%.

If rates increased to a normalized 6%, annual interest payments would soar to nearly $1 trillion — about 26% of the nation’s budget.  It would exceed every category of spending, including military, social security and health care.

That’s if we were miraculously able to hold the line at only $18 trillion in debt.  And, it completely ignores the impact of off-balance sheet financing which most estimates put at another $50 trillion or so.

UPDATE:  1:00 PM

Heck of a day for our charts.  This one that we posted on Wednesday……turned out to be fairly predictive!

New targets coming up.

continued for members…

I’ve adjusted the purple channel to include the low just reached of 2072.93.  Note that it is just slightly higher than the (presumed) wave 1 high of 2072.40, which would keep everything looking bullish for the wavers out there.

This being Friday (and the “markets” being totally manipulated) that doesn’t mean we’ll stay north of 2072.40 prior to any bounce.  In fact, my leading case is a slight wave 1/wave 4 violation before a bounce up to backtest the SMA20 — currently at 2094ish.

It could be by just a few pennies — enough to stop out weak longs before a nice bounce.  But, ultimately, I think we’ll see backtest of the falling gray channel as we suggested Wednesday:

If the H&S should play out, it would target around 2060 — which is coincidentally (or not!) the SMA50 and might allow a backtest of the broken falling gray channel.

The white dot (2062-2066) would suffice, but an actual tag would be down around the purple dot at 2057.   If that should fail, then the red dot at the white .618/SMA100 intersection (2033ish) makes a great deal of sense.

Odds are it would entail two separate waves that could even stretch into Monday, but CL still has a ways to go to our 47.66 target (which better sets up 45.86 BTW)……

…and USDJPY has to get back down below 120.11 before turning into a pumpkin.

So, we’ll look for a bounce up to 2093, followed by a drop to 2057 before the dust settles.

If, on the other hand, the bulls pull a rabbit out of their hats and turn this thing around (in the past, 50:50′ these days, more like 70/30) then the purple channel clearly could take us up to 2138 as early as next Monday or Tuesday.

But, as we discussed last week, I expect TPTB will attempt a strong move through that critical Fib level in order to keep the party going.  And, I’m not sure that this is the right time/place.

 

 

 

A lot of people get that wrong.  They talk about drilling for oil.  But, what’s the point, when you can just spoof for it instead?

[If you’ve missed our previous discussions of spoofing, the WSJ recently put out a nice article and video discussing it in some detail.]

Crude light stumbled badly yesterday morning after the news came out that oil inventories had risen at the fastest rate since 2001.  It dropped below $50, breaking a little trend line that it’s been climbing since the 27th.

Stocks were none too happy with this development.  SPX promptly fell about 23 points to tag our target from Monday — the 20-day moving average.

If the past is any indication, SPX isn’t quite ready to make its next major move….l’m looking for SPX to move lower before moving higher, with the likely target being a test of the SMA20.

Since oil’s drop had caused stocks to also drop, it stands to reason that a recovery in oil would also trigger a recovery in stocks.  At least that’s the way algorithms work.

Sure, there is some economic logic baked in there somewhere: rising oil prices eventually contribute to higher profits in the oil complex.  But, generating higher profits takes more than a few minutes. And, stocks were getting beat up pretty badly.

Enter the oil-fueled algorithm and its vehicle: the spoof.  As Nanex’s Eric Hunsader points out, oil is being kept afloat by orders that are placed by those with no intention of being filled.

Like ES, USDJPY, and other financial instruments/assets, it’s an effective way to temporarily boost prices.  Done cumulatively, it’s an effective way to keep prices on an upward track — even in the face of horrid fundamental supply/demand news.CL, having led stocks lower, suddenly spiked 5% on the very worst day of fundamental supply/demand news in 14 years.  Stocks — or rather the algos that drive stock prices — were only too happy to respond.

Oil now yields the floor to USDJPY, which spiked above the .618 at 120.11 this morning in order to save stocks’ bacon today.

EPILOG: 4:30 PM

To believe any of the above, you’d have to accept that TPTB are taking concrete steps to manipulate oil, currencies and securities prices.  It would mean price action that, on its face, is designed to prop up SPX.

Earlier, we talked about the importance of 120.11 for USDJPY (the yellow, dashed trend line.)  Don’t look now, but USDJPY not only slipped just past it, but closed slightly above it.

And, CL, which needed to maintain the rising red trend line from a week ago…  Guess what?  It could hold, but my money is on the fundamentals mattering this time.  In other words, I’d revert to short here for our 41.14-42.41 target range.

SPX acted pretty much according to plan yesterday — getting most of the way to our 2093.55 target before CL and USDJPY panicked and bounced higher into the cash close.  From yesterday’s members’ section:

My hunch is that we’ll see SPX decline to our 2093.55 target — particularly if USDJPY declines to flesh out the rising white channel (118.75ish, depending on when) or lower.

It’s a continuation of the theme posted on Monday:

 If the past is any indication, SPX isn’t quite ready to make its next major move….l’m looking for SPX to move lower before moving higher, with the likely target being a test of the SMA20.

CL has continued higher, but ran into the channel midline that might hinder further upside.

While USDJPY — after backtesting the broken red TL — has continued lower.

Assuming we get some follow-through this morning, what next?

If 2093.55 fails, then the SMA20 at 2088.3 is the next level of support.  That would leave an interesting potential H&S Pattern in place, with the dashed white line representing the SMA20 as the neckline.

updated chart in a few…

UPDATE: 9:37 AM

I think the target will be wherever SPX happens to be when USDJPY reverses and heads higher.  Currently, 119.08 looks like the most obvious target.  It’s on the thin red TL up from 118.33 and would intersect with the purple .618 Fib.

Note that a full .886 retrace of the rally from last Friday would hit the red target at 118.75 we identified yesterday as appealing.  Given that SPX is selling off pretty nicely with a minor downturn overnight, we can only imagine how big an impact that might have.

UPDATE:  9:54 AM

SPX has reached 2090.55 so far.  At this point, the neckline is plenty flat enough.  And, it has nailed the larger purple channel’s .786 line and very close to the small purple channel’s .236 line.

[A drop by CL to 50.17 would help SPX reach our actual target; but, this is probably low enough to get a bounce — at least into the european close.  It’s worth keeping an eye on.]

If the H&S should play out, it would target around 2060 — which is coincidentally (or not!) the SMA50 and might allow a backtest of the broken falling gray channel.

continued for members... (more…)

As we discussed yesterday, SPX may not be ready to make its next move.  The critical USDJPY Fib of 120.11 was tested and has rebuffed (for now) any further advances.

Likewise, VIX tested the .886 again and (for now) couldn’t penetrate it.

CL popped through the TL we discussed in the members’ section…

…which, with USDJPY’s temporary move higher than 120.11, was enough to boost stocks higher on the day.

It’s difficult to overstate the importance of USDJPY’s actions.  Two of the previous rejections resulted in 100+ point declines for SPX.

The third didn’t, but on that occasion USDJPY merely backtested the broken pennant top, and SPX was further aided by oil’s rebound and some nifty VIX monkey-hammering that broke the rising trend.

continued for members… (more…)

Friday saw a repeat of the SMA10 test, but this time SPX closed slightly below that support.

The futures are holding their cards close to the vest this morning, with ES off about 1 point.  USDJPY is going mostly sideways…

…while CL — off 1.5% — continues to hint at a retreat to the .786 or .886.

We’re examined the timing of breaching important resistance many times over the years.  If the past is any indication, SPX isn’t quite ready to make its next major move.

continued for members… (more…)

Still on the road today, so today’s post will be brief…

*  *  *  *  *

Yesterday’s call for a dip to the SMA10 was fairly accurate.  SPX reached 2103.76, which is about where the SMA10 was after all the dust settled.

So, now we’ll look for the other shoe to drop.  SPX’s upside targets remain in place, and USDJPY shows no signs of spoiling the party at this time — with the white .886 or the previous high as a likely target to lever stocks higher.

Interestingly, DX is coming up on the .500 retracement of the decline from 121 to 71.  It looks like a pretty good channel intersection as well.  Perhaps a reversal in next week or so?

GLTA.