Yesterday was a good start toward our downside target.  Today, I expect the other shoe to drop.

USDJPY had no trouble reaching our first and second downside targets.  And, Abe’s suspension of the sales tax hike last night permitted the pair to finally break the rising red TL and get most of the way to our third target at 108.25.CL was a big help, nailing our downside target and closing below its SMA10 for the first time in weeks.The only thing that spoiled our party yesterday was NKD, which ramped into the close and dragged the algos with it.It didn’t appear sustainable at the time, hence my suggestion to maintain a short position overnight.

continued for members…Note that NKD’s rising red channel is currently broken, though that could change at any time.My downside target for SPX remains unchanged: the .618 at 2078.53.  We also have the white .382 at 2077.22 in close proximity.  Either will do.Recall that this would represent a backtest of the yellow neckline that was so unceremoniously ignored on the way up.  Backtesting it is a way of emphasizing that the pattern was not only busted, it was trampled and left behind in a bullish frenzy.  Since it’s been a while, here’s a reminder of the yellow H&S Pattern: from May 6.If, by some combination of CL and USDJPY bearishness, it doesn’t hold, then things begin to get very interesting.  The falling white channel, for instance, was never backtested.  The top is down around 2046.  But, there’s a tangle of moving averages at 2065-2069 to navigate first.It’s an appealing target all the same, as it would close the gap from May 23, the last day before CL went nuts and broke out of its own falling channel which is being backtested this very moment at 47.92.

For those trading eminis, its yellow neckline/.618 is at 2073.50ish, depending on when it occurs.

UPDATE:  9:38 AM

SPX has reached the bottom of the rising purple channel, the first serious support in the drop to 2078.  As we discussed yesterday, this is an impediment.  I’d look for a bounce here, perhaps substantial, to let the moving averages catch down.   

My best guess is the purple midline at 2088 for starters.  If that breaks, then 2090 is a possibility.  The SMA5 10 should be there shortly, and it would correlate with ES backtesting its broke purple channel at 2089ish.  Ideally, the bounce will be over by 10:00 or so.But, as always, look to CL and USDJPY for clues.  Right now, CL has backtested the white channel as discussed above.Note that ES’s rising purple channel has already broken down, so no help there.UPDATE:  9:54 AM

USDJPY and CL aren’t delivering much of a bounce. CL looks like it’s slipping through the channel top. Though USDJPY might intend to backtest the SMA20 at 209.33.  ES has reached its SMA5 10 and 20.  I’d revert to short here. UPDATE:  10:00 AM

Of course, as soon as I wrote that, USDJPY spurted up .23 in 1 second, putting NKD back slightly above the red channel bottom.  It should be enough to get SPX up to the SMA5 10 at 2090 as discussed above. Gotta love those algos… UPDATE:  10:06 AM

Now CL is getting into the game.  Back to cash here as it’s pushing back above the channel top.  If it keeps going to the white wedge bottom at 48.10, it could drive SPX back to the SMA5 200 at 2094.44, though the red .786 at 2092.83 is also resistance. Note that NKD is safely back within the rising red channel. It’s always hard to know, when the BoJ steps in to prop up stocks, whether they’re merely trying to slow things down or are trying to break a trend.  If this case, there’s obviously better support for USDJPY down at 108.25.

But, they push the panic button without thinking, sometimes — especially when NKD is down over 1%.  It leaves us trying to discern from the monkey bones whether the downside is over, or it’s a delaying tactic, or even a headfake.  We’ll find out shortly.

UPDATE:  10:18 AM

Taking another shot at shorting here at the .786, only because CL is backtesting the wedge, ES the purple channel, and NKD is pushing back below the red channel bottom.  Might be premature, as USDJPY looks like it could be targeting 109.69.  So, I’d keep stops tight here. UPDATE:  10:34 AM

CL algos have emerged from their holes, seen their shadow, and have decided that’s enough downside for now.  USDJPY: “Sure, why not?”  Back to cash.  In the initial post this morning, I moved the yellow target at 2078.53 out to 1pm ET because that’s when the neckline actually crosses the Fib.   Also, a TL drawn through yesterday’s lows happens to pass right through it.

UPDATE:  10:57 AM

SMA5 200 tag coming up at the top of the hour.  Would make a nice little channel top tag…  I’ll be watching for signs of a reversal in order to short again.  If it punches through, probably a good sign to go long — though I’d want to see how it reacts at the gap close at 2096.87.   Again, keep an eye on CL, NKD and USDJPY (which is slowly easing back toward its yellow TL.) UPDATE:  11:13 AM

I get the feeling someone just explained the importance of SPX holding its rising purple channel to the guys running the CL algo…  SPX has almost closed this morning’s gap. Ironic that the spike comes on the heels of a Reuters news release showing vast numbers of tankers stacked up in the world’s oceans.  All dressed up and no place to offload…While I’d like to think SPX will reverse after closing the gap, the algos seem to have other plans — like a breakout instead of a break down. It’s happened countless times before. Should find out soon…UPDATE:  11:46 AM

SPX got within 0.10 of closing the gap.  Enough?  NKD says so, but it could be another head fake (50:50?).  Back to short with tight stops.  There’a very good chance it pops up to 2097 at the top of the hour.  Pinning my bearish hopes on the fact that it dropped through the SMA5 200 rather than simply backtesting it.  Remember, many reversals come at 12:09. CL remains a potential spoiler, especially if it pops above the SMA10 again.UPDATE:  12:05 PM

There we go.  CL popping, and it’s lifting SPX above the SMA5 200.  Back to cash until the gap is closed.UPDATE:  12:14 PM

Moment of truth: gap close imminent — with channel top and TL tags, too, and with USDJPY just backtesting its SMA50.  ES is also tagging its channel top.  CL is either putting in a deep retracement of its SMA10 tag, or about to break out again.  Need NKD to pop up to 16859 to help squeeze another point or so out of SPX. UPDATE:  12:26 PM

Gap officially closed.  Shorting here with tight stops.  Since SPX is back above the SMA5 200, it’s now support rather than resistance.  And, if it gets going again, we’ll still have to contend with the purple channel bottom down at 2090 – likely around 1:15 ET.  SPX will either backtest the broken red channel there, or push lower within the falling purple channel. If it’s to drop much, CL will need to cooperate with at least a backtest of the white wedge down at 48.3.  If they decide to prop it up through the rest of the day, it’ll dance around the SMA10 (48.88) instead.Likewise, USDJPY will need to continue dropping, with an initial target of the SMA20 at 109.33 and on to the 1.272 at 108.93 and then the 1.618 at 108.25.  And, NKD will definitely need to drop below the red channel bottom again.  The SMA100 at 16657 would make a very nice target.Those are some of the metrics to watch.  Being short is dangerous these days, only because TPTB, including central banks with no compunctions about buying stocks and futures directly, are only a button push away from sending stocks higher at any time.

The 2077-2078 target is my guess as to a downside move that would make sense for them.  It would put an exclamation point on the rise above what was a very bearish pattern.  But, as we’ve seen countless times, they often simply go with the simpler, more expedient route: nudge it a little higher.

Stay tuned.

UPDATE:  1:00 PM

Getting slightly uncomfortable with SPX, but ES just completed a better tag of the red channel, and USDJPY and CL are still below their limiting moving averages, and NKD just tagged two points of resistance.  It could definitely break out here, but this is actually a better place overall for the reversal to commence if it’s going to. UPDATE:  2:15 PM

When all else fails, there’s VIX.  Back to cash. It should be enough to get SPX up to the purple .786 at 2099.55 (a Gartley Pattern) or .886 at 2101.38.

UPDATE:  2:22 PM

Even though SPX and ES and NKD are pumping, CL and USDJPY are not.  I’d short here for a another try.  Note that ES has now completed a Bat Pattern.  USDJPY looking nice and bearish, but CL is threatening to break out. 

They’ve obviously worked very hard to get and keep stocks in the green today.  CL is up 3% from this morning’s lows — the equivalent of 63 SPX points. There’s a very good chance that they’ll not let it dump, particularly since the BoJ is taking it on the chin today (NKD off 1.6% at the moment.)  So, feel free to ignore these shorts. 

On the other hand, we sometimes get a constant stream of prop jobs all day, only to see a big drop into the close.  It’s not feeling like that now, but you never know when it’s something as arbitrary as CL and VIX propping up prices. UPDATE:  2:58 PM

I think it’s time to pull the plug on a decline today.  Going back to cash for now, will reevaluate after 3PM.For anyone playing the USDJPY short, I think you’re in good shape.  Should be much more downside after the close today.  Everything else is up in the air. CL has a potential turning point coming up at 49.3 – 49.4, the red .886 and red TL backtest.  Don’t be surprised if it occurs after the close.UPDATE:  3:05 PM

If you’re a real glutton for punishment, SPX could backtest the SMA5 200 intersection with the yellow TL at 2095ish if it doesn’t, instead, run up to tag the purple .886 at 2101.38.  It’s only a few points, but it could turn into something more.CL and NKD look like they might facilitate. Just need VIX to play along…UPDATE:  3:17 PM

CL is spoofing like crazy right now.  You can see the price flicker back and forth, trying to keep ahead of the SMA5 10.  I don’t hold great hope for this short working out.  Hold it only if you can manage the risk of a further melt-up into the close.

I see more downside ahead, but obviously days like today are designed to destroy such thoughts.  A better short is USDJPY, which could easily reach 108.93 and even 108.25 after the close.

I have to dash out and pick up one of my daughters from school, but should be back in plenty of time for the close.

UPDATE:  3:45 PM

I’m back, don’t really see any change in anything except for VIX, which is finally down to the SMA5 200 — potential support.  I’d hang short into the close if you’re able to deal with the overnight risk or hedge.

As discussed above, I believe USDJPY is due to drop later this evening, and CL might be backtesting the broken red trend line.  The risk is that all this happens in the after hours and US bears are left grasping at straws in the morning. Here’s another look at CL, without all the harmonics — clearer with respect to the red TL.  I see it dipping to the SMA20 at least, and probably to the purple channel midline now around 46.39.  Obviously, breaking the red TL was a big deal.I have to run out, will be back with more around 6 ET.

UPDATE:  8:00 PM

More interesting goings on in currencies tonight.  USDJPY seems determined to reach our 108.25 target.  Maybe EURUSD will help it get there.  Note that DX is threatening to break down, and EURUSD is threatening to break out.