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The leaks were flying fast and furious last night as everyone wants to know whether or not Japan will expand its QQE. Bloomberg’s “unnamed source” insists it won’t – at least not any time soon:
Bank of Japan officials see little need for an immediate expansion of monetary stimulus and would prefer to hold off to get a clearer picture of the economic outlook, according to people familiar with their deliberations.
Board members who gather for Oct. 6-7 policy meeting want opportunity to observe further economic data and developments in financial markets at home and abroad, according to the people, who asked not to be named because talks are private.
This was enough to get USDJPY all the way down to the bottom of a rising channel where, naturally, it was propped by another source — ex-BoJ Gov Iwata who told Bloomberg:
“Listening to Kuroda makes you think there is no need for further easing but the real economy is worse than expected,” Kazumasa Iwata, a deputy governor from 2003-2008, said in an interview Wednesday. “It’s moving in a direction where the BOJ has to do something.”
Buying more government bonds with longer maturities as well as exchange-traded funds and investing in real estate trusts are options the BOJ has for further stimulus, Iwata said. Given limits on available bonds and the need to keep buying them, the BOJ also may have to cut the 0.1 percent interest rate on excess reserves, he said.
Understandably confused, futures are clinging to a modest gain after being up over 20 points last night. Will it hold?
To answer that, we have lots of charts to look at this morning. We’ll start with the big picture, which is always interesting in the midst of a market that’s swinging wildly in either direction.
continued for members…
First, NKD’s rally took it up to the midline of an aggressively falling white channel, which it backtested before falling again. Score one for the bears.
SPX backtested the rising white channel that looked so promising until last week. From my vantage point, this channel easily qualifies as a Flag Pattern — signalling continuation of the downside. Another point for the bears.
We also cannot ignore any longer the fact that SPX’s moving averages are bearishly aligned. All together, it’s shaping up as a pretty bearish picture.
The last time this happened was in 2011, in the midst of the correction from 1370 to 1074. After the SMA100/SMA200 cross, SPX went up and tagged the SMA50, then fell to its eventual low — at which time the BoJ expanded its QQE and started hammering the yen.
And, that’s what leads us to the 2011 time period. Some of you were around when I laid out the case for a repeat of the 2007 plunge. I called it the 2011 as 2007 analog, and it worked out fabulously — providing us with the exact day and price the decline would begin. 
If you’ve noticed the numbers on the daily SPX charts lately, it’s because I’ve been tracking the similarities between this period and that.
Applied to today’s charts, the pattern would look something like this one. Though, pay more attention to the timing and direction than the actual price levels.
To be continued…
UPDATE: 9:35 AM
And, I would maintain a bearish bias until the BoJ proves that it will step up to the plate and get USDJPY out of its trading range. Does that mean they won’t support the USDJPY and carry trade between now and then?
Hardly. They’ve been bouncing USDJPY back and forth in a narrowing triangle ever since the Aug 24 meltdown. It forms a pennant pattern that is traditionally bearish. And, it comes to a head around Oct 19.
Every bounce off the bottom of the pennant will send prices higher. And, in an emergency, they can easily ramp it up to the key 120.11 level.
And, lest you run out and dump your life savings into near-dated, out-of-the-money puts, TPTB have other tools such as CL with which to boost prices — as it’s doing this morning.
It was enough to save SPX from dropping out of the rising red channel just now. 
If that doesn’t work, they’ll switch to manipulating bonds, VIX, gold or whatever in order to keep things on the rise. But, investors are waking up to the notion that the carry trade gravy train is in jeopardy. It might not be a stampede yet, but it certainly has that potential.
USDJPY is coming up on the lower bound of the Pennant. Looks to be about 119.42, though the red .786 is at 119.47 and the .886 is at 119.36. We’ll look for a bounce that would suggest we switch back to long.
From the looks of it, a bounce would allow SPX to stop falling at the H&S neckline around 1906ish — their primary concern at the moment.
10:13 AM
USDJPY (which didn’t even reach the .786) just backtested the broken channel, and will probably push back into it. 
SPX is likewise suggesting a push back into its broken red channel.
I imagine they’ll settle for a tilting of the red channel that maintains the notion of a breakout of the falling purple channel. If it drops back out of the channel, I’d be happy going short again.
UPDATE: 10:27 AM
Here’s the alternate channel — a better fit at the moment. 
USDJPY dropped back out of the channel, but is bouncing around without a decline –throwing off headfakes like crazy. Best to stay on the sidelines until it gets going.
The problem with this situation for traders is that USDJPY can ride the bottom of the channel all day long, not declining until cash markets close this afternoon — at which time it can go down and tag the Pennant bottom and start all over again tomorrow morning with a “bullish” rise off the lows.
Or… after hours of going nowhere, it will suddenly plunge to the pennant bottom without warning, bouncing back up within a minute or two and leaving traders scratching their heads over how they missed a nice day trade.
CL has backtested that broken red TL and – surprise! – is pushing higher again. It will sit at this TL all day if need be, and spurt higher any time SPX starts to decline beyond an acceptable level.
UPDATE: 10:55 AM
Right now, CL is plunging — probably to the purple channel line at 45.3 — probably in order to get SPX to backtest the SMA50 and legitimize the purple channel. If so, it’s not worth chasing. If it drops below 1912.68, it’ll probably be propped up by the SMA100.
It’s already backtested the falling purple channel, so no need to go there. But, a backtest of the H&S neckline to put it in the rear view mirror can be expected sometime today — probably during a quick USDJPY plunge to the Pennant bottom.
UPDATE: 11:00 AM
Looks like a channel tilt, alright, but it’s probably the white one drawn below. Look for USDJPY to decline just enough to let SPX tag the SMA100 at the white midline (another backtest for the broken purple channel.) It could even drop to 1900 again late in the day in order to validate the white channel bottom at the .382 — a reasonable drop after this morning’s push to the .618.
CL has done its part. 
Now, for USDJPY…
UPDATE: 11:06 AM
As far as stops go, use what works for your comfort level, liquidity, etc. But, in this case, the 5-min SMA100 (yellow) might be a good guide. That is, a sustained push below it probably signals a drop to the SMA200. The spread is currently 14 points.
Here’s a clearer view. That backtest could just as well happen as a gap down in the morning to 1900 (the red dot.) And, just for grins, we should note that the top of this channel intersects with the SMA10 at 1934 around 1PM today (yellow dot.)
Don’t think it’ll go there, but it’s the first moving average SPX will encounter after yesterday’s plunge, so who knows.
Of course, any of these moves could happen between now and then, so stay frosty.
UPDATE: 11:48 AM
Also, note that NKD futures just turned negative on the day.
Since the neckline is only 5 points below current prices, I’m not sure it’s worth it for anyone other than day traders to ride along. And, the SMA200 will reach 1900 in a few minutes — only 6 points beyond that. Use your discretion.
As for me, I have some other charting to do. I’m going to take a break from watching the paint dry and check back in later. 
For those participating in this decline, play the neckline bounce. And, if it declines below that, look for the SMA200 to provide a floor around 1900. If that should fail, then the white channel bottom should do. It’s currently around 1893.
UPDATE: 11:55 AM
Quick update here. SPX just dipped below the neckline — still in a very controlled fashion. The white .236 channel line is just below at 1901, the white .382 is at 1902.84 and the SMA200 is currently at 1899.
Odds are that SPX is targeting one of them, just not sure yet. Pretty sure it’ll wait until the SMA200 crosses 1900 before finishing this move. And, again, if it works lower, the white channel bottom — perhaps at the red .618 (1893.13) at 1PM would make a great target.
Here’s what I have in mind:
UPDATE: 12:16 PM
Nice tag on the channel line, waiting for SMA200 to reach 1900. 
Good chance it’ll bounce up and meet the SMA10 at and backtest the neckline again (1906.63) before dipping further. This should help get the SMA200 — which is flattening — up to 1900.
UPDATE: 12:29 PM
UPDATE: 1:08 PM
SPX back to the .236 channel line. 
If this plays out, look for USDJPY to hit the red TL, and if 1893 is in the cards, the purple Pennant bottom in the next 20 minutes or so.
UPDATE: 1:17 PM
Taking their time…I wonder if they just realized that a drop through the dashed, red line would complete a little H&S Pattern targeting 1872.
It’s a pretty good argument against allowing the 1893 tag just yet. Would not surprise me one bit if they waited until the close, where I placed the original white channel bottom test earlier this morning. In that case, remember, the target was about 1900. And, the alternative was to allow it during a gap down in the morning.
If this is the plan, note that USDJPY could stay in the little triangle formed by the white falling wedge and the rising red TL all the way until the close — neither breaking out or breaking down.
The longer USDJPY lingers where it is, the greater the chances of that being the plan.
UPDATE: 1:37 PM
USDJPY just broke out of the falling wedge in order to tag the channel bottom again. This confirms my fears that the plan involves a sideways chop until either late in the day or first thing tomorrow morning.
Note that there an alternative TL connecting USDJPY’s recent bottoms that connects with the Pennant bottom around 2am tonight (red dot.)
If this is the plan, ES can easily be kept aloft while USDJPY puts in an unquestionably bullish tag of support.
That means the SMA200 won’t be tagged until it reaches the dotted red trendline/neckline, and will go sideways until either late today or tomorrow morning.
That gives bears a whopping 3-4 points of downside potential now, and up to 5 points later in the day.
If it bounces at the SMA200, close your short and take the rest of the day off.
If it spurts higher than the neckline, close your short and take the rest of the day off.
Having said that, if we get a sustained push below the SMA200, the trip to the white channel bottom still represents a shorting opportunity. But, it looks pretty doubtful right now. And, the channel bottom will be up to 1900 by the end of the day. Is it really worth the dain bramage?
I’m going back to those other charts, so will sign off for now.
UPDATE: 2:18 PM
If USDJPY stays above the channel bottom, it won’t happen at all — at least not during this session.
In other words, watch your stops – especially with the approaching gaggle of SMAs currently around 1910.
Fixing the chart… back to where we started.
UPDATE: 3:48 PM
I don’t know what to make of this. A close below the white midline and the white channel bottom — which still hasn’t been broached — would theoretically be bearish. And, the 1900 mark would still be an option for tomorrow morning. That feels like more of a long shot, given how hard TPTB worked to get the averages back to green.
USDJPY has obviously been responsible, and is offering no clues to its next moves. But, a dip overnight would certainly make sense. If you can hedge overnight, a short position seems not too crazy.
FWIW, VIX suggests that a downdraft is still an option. But, it also shows the razor’s edge on which the bear’s case rests.
UPDATE: EOD
At the close…breakout or headfake and collapse? We’ll find out in the morning.
