This seems like a breakout, but is probably just a backtest of the all-important and recently broken red dashed TL on the USDJPY (note also the channel midline coming into play.)  If so, this rally should be faded.

The TL’s impact be seen quite clearly on the long-term USDJPY vs SPX chart.

Backtests have led to rallies, but those rallies have failed when the backtest completed and the pair continued falling — as it should this time.

The yen is falling because the euro is strengthening.  Why?  The ECB didn’t further crush the common currency as widely expected.  These days, a falling yen equates to stocks rallying.  If the euro continues to rally, stocks should follow.  But, it don’t believe it will.

Look at the long-term EURUSD chart.  Remember, dollar strength drives the the pair lower; euro strength drives it higher.  The yellow channel is the most dominant over the past 20 years, but the falling white channel is currently guiding the euro lower.  The pair just tagged the top of the channel on Dec 27 — the same day USDJPY topped out.

The pair had dropped through the yellow midline and the white midline in early 2012, but rallied back above both after QE3 was introduced.  On Dec 27, it reached the .618 retracement of the last big drop (from the last time it tagged the channel top) as well as the white channel top itself.

In so doing, it also backtested the yellow channel .618 line (a fourth time) and the .382 Fib of the rise from 1.18 to 1.49.   Close-up, it appears to have a chance at rising further, but should at least flesh out the purple channel bottom first — likely the red .618 at 1.3406.

Regardless, the path ahead is not rosy for the euro.  As tough as things are elsewhere, the EU economy and banking system is still on very shake ground.  A stronger euro would decimate the exporting countries which are the worst off.  The ECB will ease, and the EURUSD will tumble.

Japan, which has done all the easing they possibly can (to no avail) is probably done — which leaves the yen as the strongest (technically speaking) and the euro the weakest — with the USD representing the middle ground with a QE iron still in the fire.

Keep an eye on the USDJPY, which in addition to the red trend line is coming up on the .618 of the last major drop (from 102.92 to 100.74.)  If its rally fails here, SPX — which is also approaching a .618 at 1772.37 — should also fall back in line.

UPDATE:  3:00 PM

Both USDJPY and SPX have reached the .618’s discussed earlier.  Do or die time for the rally…