When we first noticed the similarities between recurring instances of USDJPY levitation over the past 4 years, we set about discovering the pattern that would ultimately signal the next breakout.
Sure, it could signal a breakdown, but central bankers have essentially outlawed those — in both words and in deeds.
Every instance involved USDJPY being either supported (by a trendline, a channel, a key Fibonacci level) or breaking out of a seemingly bearish predicament. In either case, a strong rally in USDJPY always drove stocks higher — without exception.
In fact, it’s fair to say (which we do, quite often) that the yen carry trade has been the single most powerful force behind stocks’ unending rally since 2011 [see: The Yen Carry Trade Explained.] This chart from May depicts the cozy relationship, alongside several key technical milestones.
Yet, the trashing of the yen isn’t without consequences. Every time the BOJ bashes the yen (boosting USDJPY), it increases the cost of just about everything Japan must import. The budgets of beleaguered Japanese consumers and importers alike are nudged that much closer to the breaking point.
Fortunately, The Powers That Be aren’t entirely heartless. It remains our thesis that they engineered the oil crash chiefly to enable the Japanese to afford to keep depreciating the yen in the face of soaring oil prices [see: Those Wacky Central Bankers.] Naturally, this kept the carry trade alive (a coincidence, no doubt.)
One might even regard the latest leg down in oil prices as paving the way for a cheaper yen — an
bribe enticement, so to speak, to the Bank of Japan. If that wasn’t enticement enough, China — Japan’s biggest trading partner — just devalued the yuan by about 2% today. [see: China Joins the Party.]
But, as much as the BOJ enjoys helping the Fed, the ECB, the BOE and the SNB with their Keynesian ambitions, they have a market of their own to prop up. As we correctly anticipated on July 8 [see: Update on Nikkei] the sharp drop in NKD panicked the BOJ.
Before the USDJPY had even reached its 100-day moving average, they sent it soaring. It had rallied by over 4% as of this morning. It was enough to push the Nikkei 9.3% higher (and SPX +4.3%) over the same period. It was quite an accomplishment — which is now in danger of coming undone. Or is it?
Note that the 6% drop back on July 8 stopped precisely on a trend line that also connects the April 1 and May 7 lows. It’s hard to know the exact timing, but a further decline to about 19,240 (-5%) would complete a huge Head & Shoulders Pattern that targets 17,275 — nearly 15% below current prices. Think that might prompt a little panicking?
Our March 27 analog predicted a denouement of some sort on Aug 13. Certainly a meltdown in NKD of that caliber would do the trick. It’s safe to say that US stocks would also be affected.
The S&P 500 has been the beneficiary of one after another central bank gimmick over the last 10 months since Fed President Jim Bullard halted the mid-October 2014 meltdown with a comment on Bloomberg that QE4 might be warranted.
But, this unstoppable force has run into an immoveable object: SPX 2138, which is the 1.618 extension of the 2007-2009 market crash [explained HERE.] Bullard, the BOJ, and the ECB got SPX up to 2134 all right, but it’s gone nowhere since then. Worse yet, it’s about to drop below the trend line (below, in purple) that connects the recent lows to that key October 15 low.And, if that weren’t enough, there are several potential H&S Patterns licking their chops, promising sizable downside in the event they’re triggered (marked with the red and white ovals.)
Bearish, right? It is… if the BOJ sits on their hands and looks away, pretending not to notice. But, with their own market in danger of a 15% correction, what are the chances of that happening?
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SPX came within about 2 points of our second downside target yesterday. From China Joins the Party:
Today’s targets for SPX include the white TL from the Jul 7 bottom and the red channel midline at the SMA200 (2074.13.)
Tomorrow’s (Wednesday’s) targets coming up…
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