The Top?

As we discussed last week, the Street needs a big, positive close at the end of the year.  It’s great publicity, boosts bonuses and gives banks an opportunity to offload some of the crap still on the books.

It presents a quandary, as numerous reversal signals have been generated by harmonic and chart patterns.  What’s the big picture say?

The charts to which I keep coming back are the currencies.  And, the one that promises the most mayhem is the USDJPY — which has done a remarkable job of forecasting equity moves — particularly since the Oct 2011 lows, when the Fed first started yakking about QE3.

We all know that QE = risk on. So, why has the dollar soared in the face of successive rounds of QE?   Doesn’t QE weaken the dollar?

It does, but the damage is nothing compared to the carnage being suffered by the yen, whose QE is massively greater on a relative scale.  Japanese QE = (risk on)n.  This is why bulls should be incredibly careful about chasing this equity rally.

In fact, based on the 20-yr USDJPY chart, there’s a very good chance that the pair is about to tank.  If it does, there’s a very good chance it’ll take stocks with it.  The chart below shows what happened the last three times USDJPY tagged the yellow trend line from 1998.

Note that the pair made new lows beginning in July 2011 and running through October 2012.  From a harmonic standpoint, the yellow grid is still very much in force.  The previous yellow TL tags have produced declines of 31%, 25% and 39% in the pair.   If the pattern repeats when the pair tags the TL for a 4th time, an average (32%) drop would land the pair at around 72 — a new low.

The bigger concern for equity markets, however, is what has happened to SPX when USDJPY tagged that trend line in the past.

to be continued



The Top? — 1 Comment

  1. I guess we need to watch volume/tick closely now to confirm any downturn from these harmonic turns, might see USDJPY 106 as a top…