SPX looks likely to test the .786 initially, after which we should see a bounce to at least the .618 and backtest the channel top.

Unless it breaks out, the medium-term target of the SMA50 remains.

As we surmised Friday, SPX reversed at the IH&S neckline and moved lower.  As was widely reported, hundreds of stocks flash-crashed into the close.  This cast a negative pall into the weekend which continues this morning thanks to the negative QE news out of EZ and China.  Futures are attempting a comeback, but we should see continued weakness after the early morning ramp.  Lots of wildcards, though, as we have existing home sales from the NAR at 10am and lots of Fed-speak on deck.

The Nikkei barely paused at the .886 Fib yesterday, choosing instead to backtest it in order to leave its options open.

The weekly chart shows that, should the last high be broken, the next serious Fib resistance isn’t until the larger scale .886 in the 17,100 area.  This works with the channel and TLs.

The Nikkei continues to drive US equity prices higher as an integral piece of the yen carry trade.  It ramps during the day, and resets during the night (lighter shade.)

The USDJPY has broken out of the yellow channel.  So, we have to consider the probability that the purple channel is in play — to the extent that any chart pattern matters anymore.  The BOJ’s Kuroda says all is well, it’s all part of the plan.  But, both Japanese businesses and consumers are frustrated with rising import prices.

Note the red channel has the same slope as previous engineered rallies — neither of which ended well.

But, look closer and you’ll see the small purple line off to the side of the red channel.  This is the new channel in which USDJPY is resurrecting its rally.  At some point, it will either rejoin the red channel or backtest it (110ish.) I would expect some backing and filling in here, but as long as it remains above its SMA10, why fight it?

The same thing happened in Apr 06, when a break in the white channel send the pair plunging (SPX lost 7.5%.)  It regained its footing and went on to make new highs in Feb and July of 07 before the wheels came off completely at just past the purple .618.

Bottom line, the pair is completely manipulated — as is the Japanese stock market, in which the BOJ routinely “invests.”  It will continue to rally until the pain of importing much more expensive goods leads those afflicted by it (anyone other than investment bankers, hedge funds and their central banking lackeys) to force Abe from office.  The chorus is growing.

For anyone wondering why the SPX stopped on a dime this morning, it was an old friend.  Hint: there’s something to please both bears and bulls.

The Inverted H&S Pattern we forecast last month has finally completed. A close above 2020ish will confirm.  Good for bulls, right?  Only fly in the ointment is everything else: the dollar, USDJPY, NKD, notes, etc. are all overbought.  So, there’s a fair to middling chance this will not be a clean break and moon shot.

If it is, the target is 2115 from 2020 — a nice 4.7% rally.  If it isn’t, there’s a very big chasm down below that QE won’t be around to prevent.

The thing that really puzzles me is that 2115 isn’t 2138 (which is the very important 1.618 Fib of the 2007-2009 drop from 1576 – 666.)  Why get us most of the way there?

However, 2138 works quite well as a target from 2044 — the grey 1.618 of the Jul 24 – Aug 8 that set up this IH&S in the first place.  And, it just so happens that the grey channel midline reaches 2044 around Oct 10.  This leads me to consider the possibility that SPX will not break out in the next few days, but will dither and dally in some sort of choppy expanded flat for a while — maybe even dropping below the current right shoulder and testing a SMA50 (1975) or SMA100 (1950.)

We’ve seen countless H&S Patterns fail in the past year; so, it’s not hard to imagine that this one will be yet another great big head fake.  Still, the confluence of the 1.618, the grey 1.618, and the 261.8 Time Fib on Oct 20 seems more than coincidence.

For anyone who doesn’t remember, the Time Fib is generated off the 2009 low, with the May 2011 high as the .618.  It fits many of the highs and lows since 2009 extremely well.  The hitch is it doesn’t tell us whether Oct 20 will be an important high or low — just that it might be significant.  And, as the chart indicates, it can easily be off by a week or two.  But, it’s worth keeping an eye on it — especially since past Octobers have been significant, and this one will feature the last installment of the freak show that is QE (for now.)

GLTA.

Well, we got both our upside and downside targets — all in quick succession.and downside targets — all in quick succession.

But, what’s really caught my eye is the Nikkei — which reached a large scale .886 — and the USDJPY — which reached the large scale 1.618.  Neither has backed off appreciably, but they should.  If it happens during the trading session, it will be tough for SPX to maintain upward momentum.

USDJPY has officially left the reservation.  Not a lot of overhead resistance until the yellow channel top at 110ish.  After that, lots of blue sky.

Not much consolidation after yesterday’s Hilsen-rally.  So, I’d look for a backtest of the SMA10/20’s on any pullback.  Otherwise, SPX never reached the .786 or .886 yeaterday.  Those would have to be the immediate upside targets.

The SMA50 looks miles away, now.  But, as the talking heads have pointed out, anything can happen on FOMC day.

UPDATE:  12:45 PM

We’ve seen general weakness following the early session ramp job.  Here’s a quick look at support and resistance.

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Good channel resistance here… would make a nice turning point if the SMA50 is going to be tested.

UPDATE:  5:30 PM

Coulda, shoulda, woulda…  Hilsenrath says the Fed will keep the juices flowing, and that’s all the “market” needed to hear.  I have no trouble believing it, as the end of QE is enough of a risk for the Fed without piling out higher rates in the near term.

Note yields sure look like they’ve run out of steam.  And, most of the time, plunge in yields = lower stock prices.

There’s no Fibonacci argument for lower prices in SPX at the present time; but, the fact that the USD remains stuck at the inflection point we discussed last week suggests this corrective move down from 2011 isn’t yet complete.

Recall that the .886 Fib is a larger scale reversal point that coincides with a channel midline that has been quite effective in the past.

The correlation between SPX and DX has oscillated significantly over the years.

But, given that much of the equity strength since Oct 2011 has been based on USDJPY strength (yen weakness), I think this bears watching.

SPX has two moving averages that happen to coincide with significant Fib levels.  I tend to think the current corrective movement will seek one of these targets.

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It’s a battle of the channels…

If the red channel holds, we should revisit the yellow neckline.  As always, keep an eye on USDJPY.  It is extremely overbought.

But, the guys writing the script are stuck.  Any move lower will tank stocks.  The market is addicted to an ever cheaper yen.  Withdrawal won’t be pretty.

And, note how prices have returned to close at the 1.272 Fib every day since first broaching it.  Clearly TPTB realize it’s out of control.

The BOJ is royally screwed.  Japan, which is already monetizing its own debt courtesy of the BOJ (most recently, at negative interest rates) would collapse under higher interest rates.  Rates must stay low, which will continue to put pressure on the yen — especially relative to the USD as the Fed tightens.  But, consumers, stretched to the limit with yet another tax hike on the way, simply can’t handle the higher food and energy costs which would accompany a cheaper yen.

Frankly, I don’t see a way out — which usually means they’ll do something even more irresponsible — like ballooning the BOJ’s balance sheet even more in order to keep the house of cards standing just a little longer and keeping USDJPY in a holding pattern as long as possible.

What will happen to the yen carry trade?  I can’t say.  With EURUSD’s continuing collapse, perhaps the hedgies will shift gears. But, as we noted a couple of days, ago, the dollar itself could be ready for a correction.  It should be an interesting next few weeks.

UPDATE:  12:15 PM

Looks like SkyNet has taken over at this point, with USDJPY and VIX taking turns pushing stocks around.  Things could get interesting if that rising wedge in USDJPY were to break down.  But, it’s more likely to happen after-hours.

Volume has gone bye-bye; so I think I’ll sit the rest of this one out.  Chances are we’ll get a big move over the weekend, but it’s anyone’s guess which direction as we’ve discussed in the past few days of big picture charts.

UPDATE:  1:45 PM

Spoke too soon!  USDJPY played along…

…and, helped ES reach the H&S neckline as we originally discussed this morning.  There’s more downside potential, of course, but it looks like USDJPY is done for now.  While it’s always nice to be right, I hate the fact that the algos were completely responsible for the move.  Will we ever get our market back from the machines?

Have a great weekend, everyone.

 

Another disappointing jobs report — which last week led to a market rally as it was interpreted as a hindrance to Fed rate hikes.  Trade safely.

The dollar chart has my attention today, as DX has completed a Bat Pattern at the key channel midline line. It has failed to advance past the midline five previous times. So, it’s safe to characterize it as an important inflection point.  Should it fail again, it has huge implications for USDJPY and EURUSD as well.

The longer-term view:

Yesterday’s USDJPY-driven ramp in the last several hours that took prices back above the H&S neckline puts a dent in our downside case.

Though, I believe there’s still a good argument.  Looking at the futures, we can see a well-formed channel, the top of which we will likely test around 10am EST.  If the usual morning pump runs its course by then, look for a dump as indicated.

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USDJPY ramp continued into the night, tagging the daily 1.272 and completing a Butterfly Pattern.  As we’ve often warned, a decline in USDJPY could end the dollar-yen carry trade momentum stocks have enjoyed since Abe first began trashing the yen.

There have been two very interesting developments in the past 24 hours. First, The BOJ just bought 3 month bills at a negative yield — in essence directly funding the Japanese treasury.  Second, Japanese finance ministers have started talking up the yen, stating that a lower exchange rate with the dollar “would not be desirable.”  Is the carry trade over, or are mom and dad merely squabbling?

 

Note that each USDJPY reversal beginning with Jan 2 (Point A) caused sizable sell-offs in stocks. From A to B corresponded to 104 points; from C to D was 77.  And, the mere thought that the party was over at Point E touched off the August swoon in stocks.  What if the party really were over?

 

After nailing the first two downside targets (D1 and D2), I’m more than a little nervous offering up a third.  But, here goes.

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