USDJPY recently failed, again, to break out past overhead resistance, dropped to our 110.75 target [see: Unscripted] where it momentarily bounced for a couple of days before dropping through its SMA200. 
Any time the USDJPY drops through its SMA200, it’s significant. With EURUSD also threatening to break out, this is a good time to look at both of them and the likely effect on DXY.
continued for members…
Our assumption has been that the SMA200 and flag pattern would break down and deliver a backtest on the gray channel at the white .618 (108.41) and red 1.272 (108.46.)
The hesitancy to pound the table on this move to date has been stocks likely year-end ramp, which has been in full swing.
But, the end of the year is here. Thus, it’s time for the bulls to prove they can keep on delivering into 2019. Can the white channel withstand a likely backtest today?
Aside from USDJPY, one important clue will be VIX. If it can push below our next two targets at 26.40 and 24.70, then USDJPY won’t be needed. The algos will have all the signals they need….
…as long as CL and RB cooperate. The problem is that they’re both sitting right at their SMA10s. While TPTB might threaten a breakout, they really can’t afford one just yet — not with critical CPI data in the works.
Combined with TNX’s breakdown…
…we’re likely to see EURUSD finally pop up to its SMA200 and stocks take a rest.
Today would be the most likely day, as ES and SPX have both popped above their SMA10s and would benefit from a backtest. Stocks’ decline should give USDJPY and EURUSD all the room they need to complete their moves.
The $64 question is what happens at that point. Our big chart calls for a sizable decline to SPX 2138 as early as Feb 1 — and this is critical — as long as TPTB don’t ramp USDJPY up to and through 114.54.
Recall that USDJPY’s white channel broke down in January (when stocks did, too) and has been backtesting it ever since. 
The problem with USDJPY spiking much higher has always been that it would generate undesirable inflation in Japan as the JPY loses its purchasing power — especially if it happens while oil and gas are rallying.
But, inflation in Japan just broke down. And, the BoJ seems to have given up trying to get up to 2% inflation — particularly in the face of the collapse in oil prices.
Bottom line, the coast is clear any time they wish to intervene — which leaves me slightly more cautious about shorting, especially if stocks begin to stumble.
As to DXY, USDJPY weakness and EURUSD strength spells a tumble. If EURUSD stops at 1.1650 and USDJPY at 108.46, it might not be an impressive tumble. If TPTB are lucky, they should be able to maintain the rising white channel.
If USDJPY does more than backtest the gray channel top or break below the purple channel bottom, then DXY is potentially in more trouble. The only thing that could save it and continue to prop up DXY is a sharp reversal of EURUSD.
As we discussed in Stagflation, Euro Style a couple of weeks ago, it has extended its sideways motion way beyond previous rising channel breakdowns – over six months so far compared to two months in 2016 and a few days in 2015.Remember, the top of the falling white channel from which EURUSD broke out in July has proven to be formidable support thus far.
But, there’s no guarantee that it’ll continue to hold. If the euro zone proves to be incapable of recovering over the next year or two and the US can maintain its present trajectory, the USD should strengthen against the euro — a breakdown in EURUSD.
I suspect the rally up to the SMA200 to reverse and we’ll be going sideways for a while longer. But, I’d want to hold long on any push through the SMA200 and be short on any breakdown below the channel top at 1.1271.
UPDATE: 2:15 PM
ES has respected its SMA10 and maintained its rising white channel so far, with VIX providing just enough oomph.
By delaying any more downside, SPX could backtest its SMA5 200 without ever dipping into the red – presumably at the close. Sure, it’s manipulation. But, it saved the bulls as much as 70 points in downside.