A subtle shift is occurring in the currency markets. As expected, DXY has broken out after finally reversing at our 89.50-89.92 target. This comes as USDJPY is sneaking up on our 200-DMA target and EURUSD has almost reached our 100-DMA target. Once all these pieces slide into place, what then?

continued for members…

With stocks having to choose between a drawn out H&S Pattern (targeting a 10% loss) or a push to new highs, what the currency markets do should matter quite a bit. Note that ES is again threatening a bearish 10/20 cross. And VIX is once again in a position to make or break equities……teasing a breakdown even as its bullish 10/20 cross widens.USDJPY is the currency pair which affects stocks the most. Its failure to break any lower has been instrumental to equities’ latest surge. So a potential reversal at the SMA200 bears watching.

While EURUSD faces an important test of its own: the SMA100 is coming up right after a TL breakdown. Other charts to watch: the 10Y and the 2s10s. Rising rates have been instrumental in boosting stocks……but note that TNX has reached the midline of its falling yellow channel again. Periodic reversals in rates have produced declines in stocks.  We haven’t seen any breakdowns in a while, though. And, from the way Fed officials are talking, they are unconcerned about inflation spiking higher.

Though, from our analysis of oil/gas prices, they should be. Is it just brave talk, or are they really prepared to see CPI and the 10Y over 2%? Remember, a breakout in the 2s10s has never been healthy for stocks.

If 10Y yields break out, ZN breaks down even worse than it already has. At what point would investors care that bond prices are tumbling?Gold investors certainly should, as the correlation between the two has been quite strong. It continues to pressure GC. Even SI backed off its recent breakout to new highs.

As we’ve discussed many times before the relationship between DXY and stocks is complicated. Most of 2018 and 2019 was marked by a strongly positive correlation. It all came undone in Feb 2020 when the market crashed.

It turned on a dime and became strongly negatively correlated for the remainder of the year. Then, in early January, it turned again and has generally been positively correlated for the past month.I need to jump on a call, should be back online in about two hours.

UPDATE:  3:30 PM

That took longer than expected…and I see that it’s turned into another one of those days when the algos are determined to reach new highs or at least leave everyone expecting new highs.

As discussed earlier, the algos have three easy tools: VIX breaking down, USDJPY rising above the SMA200 it’s currently tagging, EURUSD bouncing off the SMA100. Any of these will virtually guarantee higher highs. If all three of them, they could easily turn this into a sharp spike higher.

UPDATE:  4:40 PM

And, just like that, the bubble grows to new all-time highs.  The ES H&S is technically busted, while the SPX one (which usually matters less) would bust at 3884ish. FWIW, RSP is still arguing for a reversal……and, VIX hasn’t officially broken down.