USDJPY finally tagged our 132.22 target overnight…
…a target we set over six months ago [see: Update on Currencies Nov 17, 2021]:
Ordinarily, this might be a good thing for stocks. Not this time, as it echos the dollar’s strength against the euro.
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In our last update on NKD [see: Nov 30 Update], I somewhat snarkily disparaged the index’s legitimacy.
The Nikkei 225 is less a securities index than it is a measure of how much intervention the Bank of Japan feels like throwing its way. It’s what the Dow aspires to be when it grows up.
At the time, NKD was approaching a trend line connecting five recent lows, none of which had quite backtested the obvious Fibonacci support at 26,463. It was also backtesting a TL connecting recent highs.
As the chart above shows, NKD is backtesting a TL off the Feb 16, 2021 highs. This could be all we get, as the BoJ dislikes anything smelling like a correction.
As it turned out, the low that day was all we got. NKD rallied into year end, putting in a respectable +5.1% return for 2021 versus the 1.2% losses which would otherwise have occurred. Japanese “investment” managers no doubt cheered the rally, just in time for bonus calculations.
The rally left a bad taste, though, and I left the 27,156 target where it was – partly for spite and partly because the BoJ’s pathetic manipulation has become laughably predictable. Guess where NKD just tagged?
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The Nikkei 225 is less a securities index than it is a measure of how much intervention the Bank of Japan feels like throwing its way. It’s what the Dow aspires to be when it grows up.
So, it’s only at times like this that I bother to post it anymore.
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ES came within 9 points of our next downside target before getting a nice bounce motivated primarily by USDJPY, which was working flat out to save the NKD from a scary, and long overdue dive to its SMA200.
This bounce will be quite important to the bulls, who are no doubt hoping to avoid a bearish 10/20 cross.
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I know what you’re thinking: it’s “don’t fight the Fed.” While that’s generally true, too, the Bank of Japan is the central bank which most conspicuously wears its balance sheet on its sleeve. When my charts are a farrago of bearish indicators, but the Nikkei pushes up through resistance? I’ve learned to ignore the indicators and become bullish.
Conversely, when the narrative is incredibly bullish but the NKD slips below important support, it’s time to short. For those who haven’t been paying attention, that’s where we are right now.
We’ve had a few hints over the past week or so, but the NKD suggests there’s more to come.
US stocks just haven’t gotten the message yet.
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Our yield curve model is again sounding the alarm on overpriced equities. Unless the 10Y – which closed its June 8 gap this morning – declines sharply right away, the 2s10s spread signals a sharp equity downturn to finish the correction which began on Oct 12.
The bad news for equities? A sharp drop in the 10Y also portends a correction.
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While the Nikkei hasn’t officially been on our hit list, it’s certainly been fascinating to watch. Today, it earned its very own page on pebblewriter.com.
Late last night (early this morning?) I updated the USDJPY [HERE] which was at a critical point in its own rally to the moon. It recently broke down through the midline of a channel dating back to August 2012 and was backtesting it within the confines of a rising wedge (dashed, yellow below.)
This afternoon, that wedge broke down and the pair is heading for the bottom of that channel at 99.56 sometime in the next several sessions.
I suspect the channel will hold. But, if it doesn’t… well, let’s just say it’s a very long way down.
If that channel looks familiar, it might be the similarity to the channel that has guided the Nikkei 225 to a stunning 88% gain over the past 7 1/2 months.
Funny thing about that channel… it just broke down.
It’s entirely possible that the dip will disappear — nothing more than an intra-day burp that quickly fades from memory. But, a failure to retake the channel will more likely result in a slide to 13,112 or even 12,343 to fulfill the obvious Inverted Cup & Handle Pattern.
When channels break down, they usually just morph into something less aggressively sloped. This one, like the USDJPY, is ridiculously steep. A drop to 12,343, for instance, would result in a channel more like the gray one shown below.
What might take NKD that low? First, remember that NKD just tagged the .786 Fibonacci retracement of the crash from 18,365 to 6,990 between 2007 and 2009 (the Dow and S&P 500 have retraced more than 100% of their declines.) So, this was no garden variety reversal.
Taking a look at the smaller harmonic patterns, the little red 1.618 extension lines up with a previous bottom and the .707 of the large white pattern. So, 13,112 would likely be an interim low.
The secondary target of 12,343 (the white .886 Fib) intersects with the grey channel bottom next Tuesday, May 4, which is consistent with our general equity forecast. In a highly-correlated, cross-collateralized, quantitatively amped world, we can expect such a move to spill over into other equity markets.
The key will be closing below the purple channel bottom, currently around 13,857.
Stay tuned.
