Lots of excitement in the currency markets this morning — particularly the yen. The USDJPY plunged rather decisively to our nearest downside target… …after stories appeared in the financial press that the BoJ was embarking on a buying spree, offering to buy “an unlimited amount of bonds.” Why would they do such a thing? Yields on the 10-year had soared to as high as – gulp – 0.09%.
So far, futures have remained mostly flat — thanks to VIX’s continuing slump and oil and gas’ ramp. But, can it last?
One nice thing about patterns is that they give you something to hang your hat on. When we drew the Inverted Head & Shoulders Pattern on Jul 3 [see: Holiday Headfake] there was nothing in the news to suggest a 100-pt rally in the ensuing week.
Yet, SPX and ES landed within a point or two or their IH&S targets yesterday all the same. Likewise, all the news was rosy yesterday — incessant talk of renewed buyout fever and imminent, glowing earnings reports.Yet, completion of the pattern, combined with a channel midline, put a pause on the rally right where expected. With its SMA200 now a mere 30 points below its 2.24 extension, SPX can backtest any time it likes with plenty of support around 2700.
In fact, if ES is able to hold the (formerly broken) channel into which it reinserted itself, the damage would be limited to 20-30 points.
One key: VIX. So far, it has put the brakes on at a backtest of the recently broken straw-man trend line. If it can remain below the red TL and the SMA200, and USDJPY keeps ramping, stocks will suffer a mild pullback. If the coming drops in oil and gas get going, then SPX will do well to hold 2750 and, depending on the PPI/CPI numbers due out today and tomorrow, could test 2700 again.
If we should dip below the SMA200 and 2.24 extension again, then it’s time to hold on to your hat.
The 10Y yield has clearly broken trend as expected, with a couple of Fib tests the only things standing between it and our downside targets. Our 28.56 upside target from Jan 10 [see: China – It’s Not Me, It’s You] has officially yielded. This is what stocks were waiting for — a sign that interest rates’ climb past 3% wasn’t as certain as most analysts suggested. ES broke out of its slump and pressed on to new highs, finally joining SPX in regaining its 2.24 Fib extension.
This leaves our analog on track with our next targets easily in reach. It also confirms the time adjustment that was suggested by the most recent dip and the redrawing of VIX’s (and everything else’s) path for the next six weeks.
I remember Oct 15, 2014 like it was yesterday. SPX had risen sharply on the back of the yen carry trade, popping through important Fib resistance at 1823. But, it had just broken trend line and channel support. To make matters worse, it had just dropped through its SMA200 at 1905.The culprits? USDJPY had reversed off heavy resistance and its 10-week rising channel had broken down. And, equally concerning, the bond market signaled more stock carnage to come.
The more troubling development for Mr. Market is the bond market. The 10-yr note futures shot through the previous high overnight, complicating the prospects of a quick resolution to the market’s correction.
Note that while we might see a reversal today on the white Fibonacci grid — the .786, .886 or the 1.272 itself — we still have to deal with the grey grid, which suggests the possibility of a drop to the .786 at 1798 or the .886 at 1770.
A drop to 1800 would have meant giving up that important Fib support at 1823. More importantly, a 10% correction would occur with a drop to 1817.33 or lower. Who needed those headlines in the middle of spectacular rally to new all-time highs?
The solution?
SPX’s plunge halted at 1820.66 — 3.33 points above what would have been an official correction. No fuss, no muss. The Fib line which had once loomed as formidable resistance could now be reclassified as support.
What has been is what will be,
and what has been done is what will be done,
and there is nothing new under the sun. Ecclesiastes 1:4-11
As I went to sleep last night, marveling at how SPX had taken a rather circuitous path to our 2703.62 target,I wondered whether the 2.24 Fib would hold.
I found myself thinking back to 2014. Maybe Fed President Bullard would make another appearance. I didn’t have long to wait.
On CNBC this morning…
click to play video
Futures are currently up 27 points off their overnight lows (bounced at the 10-day moving average, probably about 60 seconds after Bullard was booked on CNBC.) At least we weren’t kept in suspense too long!
Oh, and for those wondering why/how yesterday unfolded as it did, take a look at VIX. See that little dip (yellow arrow) below the trend line from Jan 26? Yep, that’s all it took.
When VIX climbed back above the yellow trend line, SPX promptly gave up all its pre-minutes ramp job.VIX has obviously proven it’s still incredibly powerful. Who needs a 40% spike when a 20% one can put on the brakes so effectively? The flipside, of course: if VIX decides to pop up to 26 anyway, SPX will likely ignore Bullard and also test its SMA10.
Bullard might be able to divert attention from the interest rate problem. But, it clearly hasn’t gone away.
This time, it’s a spike in rates rather than a plunge. So it’s a different kind of interest rate problem. As a result, this one might be tougher to rectify. And, the implications for the overall economy are much more serious.
With the S&P futures off around 100 points Tuesday night, I noted that if the selloff lasted, SPX had a very good chance of tagging the .786 retracement at 2034.97 the next day. Instead, we got the biggest overnight turnaround since Mar 2009 and a breakout of the channel SPX has been in for the past three months. What happened, and why?
While most analysts were scratching their heads over the repercussions of a Trump presidency, central planners were busy ramping USDJPY for all it was worth. Just this morning, it reached our next upside target — a rally of over 5% in about 24 hours.
Was this merely a case of not letting a good crisis go to waste, or is there something more fundamentally bullish at work here?
Note: Final 24 hours for our celebratory Membership Special. Annual memberships, normally $1,750, are being offered for only $640.42, less than $2/day for daily forecasts and live, intraday market commentary geared to helping you avoid and even profit from the volatility we’re seeing. For more details and to sign up, CLICK HERE.
* * * * *
I sat down to update the CL and GC charts tonight, but quickly realized there’s no point until the following pattern is resolved. How about it, central bankers? Are you ready to let the markets run where they will?
Because, ES’ Head & Shoulders Pattern below targets 1530 — another 17% lower. For anyone keeping track, that’s a 28% drop from last May’s highs. Today’s key level, 1837ish. A close below here would be quite bearish.
BTW, the only reason the above chart is where it is…? This chart: the USDJPY — which has gone nowhere for the past 14 months. It’s also perched on a precipice.
Put them together, and the relationship is unmistakable. Every time USDJPY dips to the bottom of the red channel (at the yellow arrows), ES takes a dive. In fact, the dives have been deeper with each successive dip.
SPX completed its own H&S Pattern last week [see: Are You Happy?], but hasn’t been able to rebound because it was waiting on ES to arrive at its own line in the sand.
So, come on, central bankers. We’re curious. Have you more tricks up your sleeves; or, are you finally ready to take the quotation marks off the “markets?”
…after stories appeared in the financial press that the BoJ was embarking on a buying spree, offering to buy “an unlimited amount of bonds.” Why would they do such a thing? Yields on the 10-year had soared to as high as – gulp – 0.09%.
So far, futures have remained mostly flat — thanks to VIX’s continuing slump and oil and gas’ ramp. But, can it last?
