As we expected, the BoJ left QQE largely unchanged.  Rates are unchanged, except for a yield curve twist that could marginally steepen the curve.  The amount of money being thrown at stocks/bonds remains unchanged except that the TOPIX will be emphasized over the Nikkei 225 (at least until they own most of the TOPIX too.)

From our base case in yesterday’s post What to Expect:

The BoJ and FOMC both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.  EURUSD will drop through its SMA200 and CL will rally strongly enough to keep stocks on the rise… USDJPY will sell off initially, reaching 100.50 or 100.08…

Things went pretty much as planned.  Oil and NKD spasmed higher.  The EURUSD plunged below its SMA200.  And, after the initial self-congratulatory spike, USDJPY nailed our next downside target — though it really took some patience (and, nerves!) to see it through.

Next, we’ll find out if the FOMC can be as accommodating (pun intended.)

continued for members…

A quick look around the horn.  CL popped up above the SMA50 and SMA10. DX initially popped out of the triangle, but quickly fell back… … as EURUSD backtested its SMA200. 

NKD spiked as the BoJ no doubt crammed a bunch of money into it (the usual “ain’t we smart” self-congratulatory BS.)

SPX closed on a down note yesterday — a head fake inspired by VIX popping out of the falling white channel.   Futures are up 7 points at present.  But, again, we shouldn’t see much follow-through until after the FOMC announcement.  There’s no point in emboldening the FOMC to do something stupid.  And, of course, they still could.

No intraday posts today, as I’m focused on the big picture stuff.  I hope to get some readable charts put together before the FOMC announcement.  Right now, it’s a jumbled mess that even I have a hard time deciphering.

As a reminder, our three scenarios, dubbed the good, bad and ugly, as detailed yesterday:

GOOD (BASE) CASE:

The BoJ and FOMC both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.

EURUSD will drop through its SMA200 and CL will rally strongly enough to keep stocks on the rise, reaching 52 or higher by Oct 10.  DX will muddle along, possibly reaching 92.53 or 93.11 on the initial news before euro weakness props it up.

USDJPY will sell off initially, reaching 100.50 or 100.08, before recovering through Oct 10, at which point it will recover.  If it breaks 100, the next support isn’t until 94.83.

SPX is a little tougher. I’d look for SPX to reach 2214-2223 by Oct 11.  With the election less than a month away, I imagine the polls will determine what happens next.  If Trump is leading by much at all or gaining momentum, I’d look for stocks to start selling off — reaching at least the SMA200 which, by then, should be around 2065.  If he’s behind by much and is losing momentum, I think SPX is more likely to stay relatively flat through Nov 8.

I base the above on the belief that Trump represents a threat to the Fed’s autonomy and authority.  If investors expect him to prevail, this would undermine: (1) their belief in the Fed’s ability to prop up markets in 2017, and (2) the Fed’s interest in propping up markets.  It makes a more compelling narrative if stocks start dropping on the expectation of a Trump presidency.  I believe the Fed will pull out all the stops to ensure Trump is not elected — whatever that takes.

I expect the Fed to raise rates after the election, regardless of who wins.  The only caveat is that if Trump wins and the market has already sold off significantly, the Fed would probably hold off on a rate hike.

BAD CASE

This one’s pretty straightforward.  BoJ eases some, but the Fed raises rates.  If this happens, it means they collaborated to mitigate the fallout.  The dollar would strengthen significantly, so we’d still get a sell off in EURUSD and a very strong rally in USDJPY.  Since the yen would be worth less, CL would also need to sell off.  Stocks would likely fall significantly within a few days — perhaps testing 2088 fairly quickly.  If it failed, then 2058 is a good possibility.

UGLY CASE

BoJ stands pat, and Fed raises rates.  Nowhere to go but down.  DX would shoot up quickly, but CL and SPX would tank.  2058 is probably a given, with a decent chance of 2000 and, if that fails, 1956.

 *   *   *

Here are some charts which will, hopefully, clear up some of the bigger trends at play.  We’ll start with channels.  The 60-min close-up focusing on the falling white channel:

And the larger rising white channel within which it’s nestled.  It should be slumped over a bit more, but the Brexit stick save was a little premature.

And, the jumble of other major channels.  The numbers are arbitrary, but will hopefully help me identify them for you.  White channel 8 broke down after the October 2014 correction, but Bullard’s comments about QE4 provided a massive rebound/backtest that went much higher.

Rising purple channel 7 seems to still be in play, and seems to me to be likely to continue to work — providing the next decision point for the SPX if it pushes higher after today’s FOMC announcement.

Falling purple channel 1 was working extremely well until Feb 11’s spike higher in USDJPY and CL truncated the 5th wave down that should have reached 1790-1800.  They wanted to hold 1823, and they did it.  So, channel 1 was replaced by falling white channel 2.  This gave SPX more headroom in early June, when it broke out of channel 1 and ran up another 20 points in advance of the Brexit vote.

The Brexit lows, in addition to backtesting falling yellow channel 4 as expected, helped establish the rising white channel 5, which I have relied heavily upon in charting the past few months.  It also marked the midline of a new channel I charted a few weeks ago: the rising yellow channel 3.  Note that last week’s lows tagged this channel’s .786 line.

Channel 3 is interesting because it has so much downside potential.  Its bottom is currently around 1865.  But, of course, reaching those lows would mean a lot of bullish patterns/channels break down first — something that’s not going to happen unless the Fed raises rates and/or Trump wins the White House.

It’s more likely that its midline might come into play again after the election or a December rate hike.  Note that it intersects with the rising purple channel 7’s midline at 2050-2055 in December.

This means, of course, that white channel 5 would have broken down.  And, that’s the biggest crapshoot element of all these channels.  With two FOMC decisions, another BoJ decision, and a major election in the next few months, anything could happen.

What I expect to happen is we’ll test purple channel 7’s top in October, ideally at 2214-2223 around the 11th, before another leg down that either tags channel 5’s bottom or it breaks down.  The white dot at 2138 marks the demarkation between a breakdown or rebound.

I should also point out that the Brexit lows also tagged the midline of a very large rising red channel 4, seen on the weekly chart below.  Its bottom was established in 2009, and its midline was tested (broken, actually) in 2011 and again in Jan 2016.  It rebounded both times after massive intervention, so the Brexit backtest was important.  If the midline ever breaks down, which it eventually should, it could yield another test of 1823 in October 2017 — the white dot where the red channel bottom finally reaches that level.

Last, but not least, this large weekly chart shows a huge white channel dating back to 1900.  Its midline was backtested following the tech bubble crash, was broken by the 2008 crash (which tested the .236 line) and backtested again over the past year or so.

It’s easier to see if we zoom out a bit.  I also like this view because it shows the Fibonacci time levels, which have done a decent job of forecasting major turning points.  The one notable exception was the October 2007 high.  Had SPX reversed at the .886 (price) retracement of the 2000-2003 drop in February 2007 (the 100.0 time Fib level) rather than breaking out, the falling purple channel top (which is now a midline) would have made a nice, enduring top.

Recasting it, instead, as a midline means the top of this channel is currently up around 2138.  It can be seen on the daily chart as falling purple channel 6, and it was just backtested (along with the top of falling white channel 2) last week.

By all rights, SPX should eventually break down and tag the large, white channel bottom.  It’s currently around 860 and doesn’t even reach 1000 until Sep 2018.  With central bankers’ very strong preference for inflation and rigged markets, I’m not holding my breath.

This chart also shows a very large rising purple channel that dates back to the mid 90s.  It’s done a great job of predicting major price swings.  Note that the more recent purple channel 7 is exactly parallel to it, and is in fact a subset.  This large, purple channel’s .786 line is currently around 1700, and it intersects with the red channel bottom in April 2017 around 1730 (the purple dot.)  Again, don’t see it happening — but, it’s worth noting.

The Fibonacci charts are a jumble right now as the past two months have gone sideways following the Brexit breakout.  The closeup shows the key price levels suggested in the scenarios detailed earlier in this post.

This one shows the post-Feb 11 picture.

And, this chart shows the last couple of years.  SPX sliced through 1823 so easily, but felt the need to backtest it twice from very far away.

And, the past 20 years from a Fib standpoint.  

UPDATE:  1:15 PM

I’ll take a break and get ready for the Fed announcement.  This morning’s highs aren’t holding.  But, again, that would have been counterproductive.  If there’s much more of a dip before 2:30, it could reach as low as 2128 without the rising red channel being in danger.

Here’s an update on everything else.

UPDATE:  2:03 PM

No change in interest rates.  SPX should rally here.  I’d look for all the elements in our base case to play out.  Since there wasn’t a big spike right off the bat, I’ll push our 2175 target (yellow) off until later in the day or even tomorrow.

A reminder:

The BoJ and FOMC both stand pat, with the BoJ possibly increasing equity purchases (but shifting to TOPIX from NKD) and the FOMC pounding the table on a December rate hike to help prop up the USD.

EURUSD will drop through its SMA200 and CL will rally strongly enough to keep stocks on the rise, reaching 52 or higher by Oct 10.  DX will muddle along, possibly reaching 92.53 or 93.11 on the initial news before euro weakness props it up.

USDJPY will sell off initially, reaching 100.50 or 100.08, before recovering through Oct 10, at which point it will recover.  If it breaks 100, the next support isn’t until 94.83.

SPX is a little tougher. I’d look for SPX to reach 2214-2223 by Oct 11.  With the election less than a month away, I imagine the polls will determine what happens next.  If Trump is leading by much at all or gaining momentum, I’d look for stocks to start selling off — reaching at least the SMA200 which, by then, should be around 2068.  If he’s behind by much and is losing momentum, I think SPX is more likely to stay relatively flat through Nov 8.

I base the above on the belief that Trump represents a threat to the Fed’s autonomy and authority.  If investors expect him to prevail, this would undermine: (1) their belief in the Fed’s ability to prop up markets in 2017, and (2) the Fed’s interest in propping up markets.  It makes a more compelling narrative if stocks start dropping on the expectation of a Trump presidency.  I believe the Fed will pull out all the stops to ensure Trump is not elected — whatever that takes.

I expect the Fed to raise rates after the election, regardless of who wins.  The only caveat is that if Trump wins and the market has already sold off significantly, the Fed would probably hold off on a rate hike.

UPDATE:  3:15 PM

Nice bounce so far.  Noting that SPX did come up a little short of its .618 (2165.28) on Sep 12, we could get a pause there this time around.  I think SPX will manage to get past, but don’t be surprised if it pulls back, especially if it occurs at the close.

Other important levels coming up: the SMA20 at 2162.05 and the SMA50 at 2168.27.

Note that VIX has plenty more downside potential.

UPDATE:  3:50 PM

Just reached the .618 at 2165.28.  We could see a pullback here, though VIX has dipped below its SMA50 and has further to go — suggesting SPX will likely pop through.  The safe move is to take profits and be prepared to go long on any push through.  But, with the SMA5 10 approaching the SMA20, I don’t see very high odds of a big drop.

As we approach the close, let me reiterate I see SPX continuing higher.  That doesn’t mean we won’t see today’s gains digested on tomorrow’s open.  So, only hold long if you can hedge, watch your position, or live with the possibility of a gap down in the morning.

UPDATE:  4:00

At the close…

 

 

 

 

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