Currency Crisis Continued

As we continue, let me sum up a possible scenario...

3C has been showing strong, longer term distribution in the market, 3C as well as Don Worden' Money Stream (2 totally different accumulation/distribution indicators) both call the 2007 top and agree about the character of the market from 2009 forward.

SPY Daily 3C chart (2005-2013)

 From the left to right, at the green arrow: from 2005 to mid 2007 3C is moving up with price at the green arrow, this is "Price and 3C trend confirmation.

"A" The 2007 top in which 3C shows a negative divergence (distribution)

"B" 3C makes a positive divergence at the March 2009 low, accumulation. At the same time, November of 2008 QE1 is launched, at the March 2009 lows the F_O_M_C announces the will add $700 Billion in MBS and $300 Billion in Treasury purchases.

"C" 3C goes negative as QE1 ends in March of 2010, the market tops 1 month later in to 3C distribution.

"D" 3C goes negative in to the April 2010 top as QE 2 ends in June of 2010. Shortly after that in to the late July/early August bounces, 3C goes negative (distribution) and the SPX drops by nearly 20%.

"E" 3C goes positive (accumulation) in to the early August lows after a -19% decline.

"F" 3C does negative (distribution) before and in to the September 13th F_O_M_C launch of QE3, the market doesn't rally, but falls 8% over the next couple of months. 3C had called the distribution in to QE3.

"G" 3C is leading negative (strong distribution) in to the 2013 rally and new SPX highs,

***3C distribution signals can also be institutional short selling as both come across the tape as a sale***

It appears smart money is using price strength to sell and / or sell short in to as this is one of the sharpest leading negative divergences, even worse than 2007's top / 3C distribution. 

At the same time,  Shizo Abe who is a monetary ultra-dove (who will nominate like minded individuals to the BOJ - Japanese Central Bank-Bank of Japan) defeats the former PM in a September run-off vote for the LDP presedency and as of December 26 2012, Abe becomes the new Japanese Prime Minister as LDP wins in a general election landslide. By March 2012, Kuroda is confirmed as the BOJ's chairman with several new like minded governors that Abe nominated in an attempt to halt 20 years of Japanese deflation

Yen reacts to Shinzo Abe's election victory...

The Yen moves higher vs. the $USD as Shinzo Abe wins a run off vote, the Yen starts moving up in an almost parabolic fashion as Abe becomes the PM in December 2012 and Yen reacts to the new leadership and "ultra-dovish" Abe BOJ nominees.

Back to the SPY/3C

On a closer timeframe, here's the November 16th lows with 3C accumulation. There has been distribution in to this move higher and now 3C is in a leading negative low, far below anything on the chart. The Tend Channel stop out os around the same time as some significant moves in currencies and changes in character as well as very significant market breadth changes that I believe cannot be read in any other way than, smart money has been selling and moving out of a lot of stocks regardless of what the averages have been doing. There are few thing as deceiving as price in the major averages.

 On a short 3 min chart looking at recent action at "A" we have a head fake move that has obvious distribution in to that move, there was another at "C" and "B" showed distribution as well. The accumulation at "D" was VERY small compared to the price move which makes me thing there's been a lot more short selling than you might think. "E" shows some short term 3C/ Price trend confirmation earlier in the trend (about the same time the F_E_D leaked the F_O_M_C minutes a day and a half earlier and allowed investment banks like JPM and GS to trade on what was essentially insider information last week, Martha Stewart went to jail for a LOT LESS! At "F" there is a VERY serious leading negative divergence and this is the same time that the Yen has been moving up from a base that has been under accumulation since April 5th, this would cause the Carry Trade to be closed out.

 Don Worden's Money Stream confirms the 3C readings.

 Recently there's a deep leading negative divergence in Money Stream just before the Trend channel was hit and if you look at the last post, the same time market breadth deteriorated badly, it seems there was a lot more selling there than people think because of the price action in the major averages, the price action in a majority of stocks has been far less bullish, in fact downright bearish, breadth is objective. At "B" the Trend Channel was broken, but as I warned as that happened, that doesn't mean an immediate reversal, often there's a lot of volatility just after, but in my experience, it has been best to take the Trend Channel signal because the gains that are to be had after the stop tend to be very volatile and can disappear in the blink of an eye. At "C"price in the SPX moves higher, but Money Stream moves to a leading negative divergence, never moving higher with price in confirmation again. At "D" Money Stream 'should" (like 3C) be making an all time new high with price if there was confirmation, both MS and 3C are telling us that there has been heavy selling in to this move higher and as we have seen in looking at ES's VWAP, it has been trading around or above VWAP and the 2nd Standard deviation top channel, which is where orders are typically sold. Volume has not confirmed either, any "healthy" move higher should see expanding volume with price, it's "Confirmation 101".

The long term Money Stream/SPY chart shows the same as 3C, confirmation in to the bull market of 2002-2007, distribution at the 2007 top, volume showing capitulation "C" near the lows and "D" the lows on expanding F_O_M_C QE1 policy. Since then, MS has been in a strong leading negative divergence as this market has been fueled higher led by central bank manipulation, not anything near solid economic fundamentals and it looks like the F_E_D is preparing the market for the "Punch bowl" to be taken away (that didn't workout well in 2000 or 2007. "F" shows once again, diminishing volume in to the move higher, people may discount it as "It's different this time", but it never is, they have been saying that for centuries.

I believe the higher $USD (which moves opposite the market) and a higher Yen (which causes the Carry trade used to finance leveraged stock purchases) are both going to put significant pressure on the market, not to mention everything else from F_E_D policy to market breadth and leading indicators.

The extreme move in gold and silver Friday as you know, was something we expected to some extent in the context of a pullback, but the extreme nature of it leads me to believe profitable positions that are years old in both (especially gold) were sold to cover some carry trades.

While gold/GLD (green) hasn't been trading in its normal inverse correlation with the $USD for at least a couple of months since late February,recently the correlation has been there, however for GLD to make a move like it did on Friday on the kind of volume it did, the $USD (red) would have had to pull out of the pullback and move to a new high (red arrow).

As mentioned before, I believe the $USD is coming off a larger longer term base and has been pulling back recently, here's the 3C/$USDX daily chart (these are VERY strong signals in 3C at 1 day).

Here's the "W" base I pointed out in the last post with 3C leading positive divergence at "A" after a pullback to bring prices lower in to accumulation range at "A" and a stronger leading positive divergence at "C" ,  the recent pullback that has allowed the SPX to make its new all time highs while 3C has been in line-no negative divergences.

I also believe this pullback is ending which will pressure risk assets like stocks and commodities.

 The 30 min $USDX futures show a 3C positive divergence in to the $USD recent pullback, that's the point of a base pulling back, to accumulate on the cheap.

 The more detailed, faster 5 min chart shows some short term small distribution to pullback price and strong positive 3C divergences in to the pullback suggesting the $USD pullback is about to end and prices head higher.

The much faster 1 min $USDX chart shows the same strong positive divergences with very weak negative divergences to pull back price with a strong leading positive divergence in to the start of trade for the new week (green arrow), this is what I expected to see on Friday when I said,

"And for the week, the USD pullback has been supportive of the market, but the last few days something hasn't been right. I will look this weekend, but I suspect currencies are about to flip, the $USD back to its uptrend, the Yen moving higher and some others that won't be good for risk assets like the SPX."

As for the other part of the equation, the Yen and EUR/JPY / USD/JPY...

 The hourly Yen Futures single currency chart shows a leading negative divergence (distribution ) at "A" and a nice rounding bottom with a leading 3C positive divergence (accumulation) at "B", this is what I was worried about on April 5th hours after the BOJ announced their QE on steroids, the most ambitious Central Bank QE ever seen and I think it may have backfired on the BOJ.

 The very strong 30 min 3C Yen chart shows strong leading positive 3C accumulation at "A" followed by a move higher in the Yen at "B", this is not what the BOJ wanted to see and it is certainly not what anyone with an open carry trade wants to see as the cost of that trade is moving against them.

As for the 1 min chart, there's a strong leading positive divergence at "A" followed by a move up in the Yen and what looks like a triangle consolidation at "B". Normally this would be taken as a bullish consolidation/continuation pattern and I think the longer term charts say the Yen goes higher, but in the short term this could be a head fake move to  bring the Yen lower to accumulate or if we see strong positive divergences form, it could be the price pattern it looks like.

Opening trade tonight in FX/Currencies is moving the way I expected Friday, the reason for this analysis, it's not what the BOJ wanted, but more importantly it puts pressure not only on the market due to correlations, but it puts pressure on big institutions to close their equity trades and close their FX carry trades as they are quickly becoming expensive, remember some of these trades are at 200:1 leverage so every pip can be significant.

 The carry pair of EUR/JPY has been moving down and opened lower for the start of trade this week, tried to move up and hit a new low.

The other Carry trade, the USD/JPY has been moving lower, pressuring carry traders and I believe the reason GLD was aggressively sold Friday in part because over several years, these are some of the most profitable positions institutions have.

The BOJ WANTED to see the $USD/JPY trading at $100, but it's moving away from that level.

From the short term 3C charts, I believe both pairs, but especially the $USD/JPY can bounce overnight, but I believe the pressure stays on them .

JGB's are under pressure again tonight (the sign of failure for the BOJ) and gold and silver are selling off again, it is very probable that cash needs to be raised to meet margin calls on JGB (Japanese Bonds) positions.

The end result, I think the Bank of Japan may have pushed Central planning too far and may be seeing their QE policy blow up in their faces.The end result, I think the Bank of Japan may have pushed Central planning too far and may be seeing their QE policy blow up in their faces.

This might be too much for the market to handle, I believe this is going to be too much to handle. I expect lower prices soon.

A Currency Crisis

I'm taking my time this Saturday afternoon to bring some events that I believe are very significant to your attention, perhaps you'll have something to add as often members do.

Let me set the stage, it's important to know what is "normal", what is not, what we have seen on the horizon long before anyone imagined it and what has happened in a flash of a moment that may (I can't see how it won't) have severe consequences.

Lets start with the heart of the matter, in yesterday's Leading Indicators post, I said the following with true concern...

"And for the week, the USD pullback has been supportive of the market, but the last few days something hasn't been right. I will look this weekend, but I suspect currencies are about to flip, the $USD back to its uptrend, the Yen moving higher and some others that won't be good for risk assets like the SPX."

You may recall the BOJ (Bank of Japan) policy statement at 10 p.m. on April 4th, they laid out the most ambitious QE plan ever attempted by a Central Bank. The Yen immediately dropped and I remember this very well because I spent the entire night and a good part of the early morning hours on April 5th monitoring the action, (when I felt safe that the situation was under control for the short term and felt safe it wouldn't lead to a disaster in the market-the entire reason I stayed up until 4 a.m.). The last post was at 3:45 a.m. Friday April 5th, "Yen Looks to be Under Control... For Now" posted at 3:45 a.m. (I remember well because I slept the following Saturday and Sunday until 2 p.m. as that week was filled with days starting at 8 a.m. and finishing well past midnight and even 4 a.m.).

What had happened was 3C had clearly shown FX traders were going short the Yen in advance of the BOJ's policy decision which was clearly going to be Ultra-Dovish and filled with QE as Japanese P.M. and his nominated pick to head the BOJ (Bank of Japan-Central Bank), Kuroda had been promising for months.

Here's the immediate aftermath on a Yen chart posted Friday April 5th at 3:02 a.m. "Market Futures-After the (new) BOJ's First Meeting, Did They Lose Control?"

This 5 min 3C chart of Yen single Currency Futures shows the negative divergence/distribution (likely short selling)  going on for hours before the BOJ's policy decision, which is when the Yen fell sharply.

I stayed up late after seeing the initial response reverse and to make sure the policy decision hadn't backfired as soon as it was announced, something that would have drastic effects on the market and something I needed to be on top of for you. The drop in the Yen was market supportive (although I had and still do, make clear that this would likely lead to conflict through trade wars and even open military conflict with China as the BOJ policy would send inflation higher in China and China is already fighting inflation by draining liquidity through repos and property curbs).

The problem was, only a few hours after the BOJ policy announcement, their 10-year JGB (bonds) plunged so fast that JGB futures on the Tokyo Exchange tripped a circuit breaker and trade was halted, yields soared, that's around the same time the positive 3C divergence (accumulation) in the Yen chart above started moving Yen prices higher (bad for the carry trade and market), but the worst thing was, rising JGB Yields and falling prices were seen as the proof that Kuroda's ambitious new QE policy had failed; this was a 2-year policy and in the first hours it seemed it had failed. 

I waited for almost another hour until I saw enough short term negative 3C divergences in the Yen itself (futures), that I was satisfied that the Bank of Japan had stepped in (intervention) to the market and propped things up, halting a stunning collapse.

That's when I posted "Yen Looks to be Under Control... For Now" with the following 1 min 3C chart of the Yen...

Remember the chart above this with the positive divergence is a stronger 5 min chart and prices started to move up, however this 1 min chart shows faster, newer action in the market, even though it's not as strong, the negative 3C divergence in to the rise in the Yen convinced me the BOJ had halted the collapse for the time being and I posted the last post linked above at 3:45 a.m. Friday April 5, 2013. *The 5 min chart remained positive, that's why I titled the post, 'Yen looks to be under control...FOR NOW". Over the following days, the JGB futures were halted due to massive decline 3 consecutive days on the Tokyo exchange, remember, this was to be the sign that Kuroda's (Head of the BOJ) plan failed.

 Here's the U.S.Dollar Index forming what appears to be a large "W" base. I will not get in to the recent shift in one at the F_E_D re: QE as it has shifted from a time they would never talk about ending policy, only say that they had more tools and were standing ready to use them to a very open debate about ending policy with some regional president's suggesting it could be tapered by summer and ended by year's end, at least two F_E_D presidents of the Dallas F_E_D and Philly F_E_D said that last week, there have been numerous other documented incidents since QE3 was announce on September 13, 2013 that I have featured as the F_E_D first changed the yardstick and then talked more openly and has been doing what I call, "Slow boiling the frog", rather than announce something drastic at once, preparing the market in smaller bits. I could write for hours just on the documented facts since September 13th, just suffice it to say the $USD would move higher, risk assets lower and it appears between that and the currency wars between G7 Central Banks, the $USD is already starting to discount that.

The $USD in green and the SPX in red on a 30 min chart shows the market has been moving up against the $USD, an unnatural correlation, but assets such as Treasuries (TLT), Volatility Futures (VXX) and High Yield Credit (HYG) have been used to manipulate the market higher to psychological areas that the market and participants want to see any way. However, since the yellow box the $USD and SPX have seemingly started to revert to their inverted or opposite relationship and the recent pullback in the $USD allowed the SPX to move to its new highs, I believe that $USD pullback is ending, but it's in tandem with Yen action that really makes this an event to keep a close eye on as the USD/JPY is one of the popular carry trade pairs.

Why the Yen?

While the Yen seems a million miles away from anything relevant to the U.S. Stock market, you must understand how a lower Yen finances the carry trade that Institutional Investors use to leverage up their cash and buy risk assets) For a definition of the Carry Trade concept, see this link. Also in a world where all Central Banks are devaluing their currency in a currency war (as we have been seeing), the result as mentioned, tends to be the $USD gets bought (also not good for the market as the $USD and risk assets like commodities and stocks move opposite the $USD normally).

We can learn a lot about the market by paying attention to the current carry trade pairs as well as market fundamentals like market breadth. This is why I have followed the USD/JPY and EUR/JPY (two popular carry trades in which the Carry Trade leverage is used to purchase stocks that are higher yielding) and have spent so much time posting charts like these two (current) along with others for this very reason.

 The carry trades like the daily EUR/JPY which I have dedicated so much time to following closely as there were subtle hints at first that the character of the trend was changing and as we know, "Changes in character precede changes in trend". 

The carry trade is profitable as long as the pair (in this case and the EUR/JPY's) is rising, which means the EUR is rising and/or the Yen is falling or falling faster than the Euro is rising. However these trades can be at 200:1 leverage, which is how Institutional investors leverage their AUM (Assets Under Management) to increase performance, but at the same time at that kind of leverage, even small moves against the FX carry can send the trade to sharp losses instantly. Leverage is always a 2-sided sword, but at this level, it's a whole new concept in risk.

 I noted the trend getting more volatile on the upside in orange,  although people often think these volatile gains are bullish, they often are the first sign of a top. In red the trend was broken, this is around the same time the market averages broke my Trend Channel, I said back then that, "When we look back a year from now, it will be that moment that is understood to have been the moment the back of the trend was broken"

Even though SPX prices are higher now, people can rarely separate price action from the clear signs of trouble; I have seen 2 months of upside price gains wiped out in a single day or gap down so these are very dangerous times to be long the market, yet people who read the headlines, "S&P makes all time new high", can rarely see any further than the headline. When the reckoning comes, they stand to lose a greater sum so fast that there's nothing they can do about it, yet the warnings were there the entire time for those who were attentive.

*Note the carry trade started on 11/12, several days before the market low was put in and the new up cycle began.

The USD/JPY carry trade also started as the market was still heading down, in ornage trade became more volatile than normal and in red it broke its trend, the slightly higher prices are very rarely worth pursuing as the volatility that comes after the break of the trend is often unpredictable and much larger than most can imagine.

So 1 piece of the puzzle is right above and you know I have been posting these charts at least 2-3 times a week for two months now as the first changes were noticed.

Lets add in another piece of the puzzle, the SPX trend...

This is my Trend Channel based on the Turtle Trader's work, it is the first custom indicator I won an award for. Similar to Bollinger Bands, the Channel track's each asset's character and creates a channel based on Standard Deviations around it, when there's a break of the channel, it's usually a stop out and an effective one, it means something has significantly changed in the character of the trade by at least 2 SDs, that stop out came in late Feb. however as I have explained, the Channel will never take you out at the top and often there's choppy volatile trade after, sometimes leading to new highs, but in the bigger picture, they often end badly with all gains being wiped out in a day or so, I've learned to trust the channel and let everything else take care of itself because I have seen the end results over nearly a decade.

***However, for my point, just note when the stop out/break of the Trend Channel occurred.

 Now here's the SPX trend, Point "A" is September 13, 2013 when QE3 was announced, this time the market didn't shoot higher and member's know what we discussed back then as well as the 3C signals. At "B" the SPX never made a higher high after some slight gains September 14th, from there the SPX traded sideways and then fell about 8% to the November 16th lows at "C", the start of a new cycle and "D" is that cycle.

 Now this is a breadth chart, I've posted these on average about once a week and I've posted about a dozen different ones, all  show the same thing at the same area. This particular breadth chart is Worden's T2108, it is the "Percentage of ALL NYSE stocks trading above their 40-day simple moving average".  As the market moves higher, breadth and volume should confirm a healthy move, however if we look at the SPX trend in green vs T2108 in red, we see something we see on
EVERY breadth chart we look at. These are actual numbers like an advance/decline line, they are not subjective, they are as objective as you can get.

At September 13 (QE3) 82% of all NYSE stocks were trading ABOVE their simple 40-day moving average. At the November 16th low, only 17% of NYSE stocks were trading above their 40-day moving average, it was a strong move in breadth to the downside. From there T2108 trended up with the SPX as it should at 68% in December, 85% in January and then around the time the Trend Channel was broken, the percentage of NYSE stocks above their 40day moving average fell to less than half at 48%.  On the recovery in March the percentage went back up to 64%. Even though the SPX was nearly 5% higher than January when breadth was at the high of 85%, the percentage of stocks holding their 40-day moving average had fallen to 64%, about a 25% decline in breadth! 

From there around April breadth made a new low at 46% even though again, SPX price was nearly 5% higher, more and more stocks were falling below their 40-day moving average, overall market performance judged objectively was failing in most of the market, yet a few heavily weighted stocks in the individual index weighting plus some manipulation such as the SPX not making a new high and being less than 2 points away from it's all time new high for 3 trading weeks until the very last day of the quarter, April 30th and in front of a 3-day weekend when "New highs " would be splashed across the news and just in time for new money to enter fund like 401k's and IRA's. Is that coincidence that for 3 weeks, we couldn't move a fraction of a fraction of  percent until just before new prospectuses could be issued and the event plastered across the media?

Around our all time new SPX high, the percentage of stocks above their 40-day moving average is 65%, this is nearly 24% lower than the readings in January, yet the SPX is 6.75% higher with barely more than half of all NYSE stocks above their simple 40-day moving average. Some breadth readings are even worse.

This tells me a few things, the break in the Trend Channel coincided with serious deterioration in market breadth, something big really did happen there. The changes in character in the currencies and especially the Carry Trade currencies have changed character severely. Remember, to close the carry trade, typically the assets bought (stocks) have to be sold (look at market breadth with more and more stocks falling below their 40-day average) and the initial currency sold has to be re-bought, that's the Yen.

The BOJ policy allowed the Yen to be covered or the carry trade closed at very favorable terms as the Yen was lower, look at the recent spike in the EUR/JPY and USD/JPY above the trend lines (the change in character is worrying enough). However as I started the idea for this post Friday saying,

And for the week, the USD pullback has been supportive of the market, but the last few days something hasn't been right. I will look this weekend, but I suspect currencies are about to flip, the $USD back to its uptrend, the Yen moving higher and some others that won't be good for risk assets like the SPX."

Ever since that night on April 5th, 3C has been showing continuing accumulation in the Yen, here's a look.

The first divergence is a strong relative divergence, in the white box, a stronger leading positive divergence. *Note this is not the 5 min chart that went positive on April 5th, this is a much stronger 30 min chart (meaning much bigger underlying flows) and the divergence is seen on an hourly, 4 hour, and even a daily chart!

As I was saying, I suspected something on Friday was about to change, it wasn't until a few of our member traders emailed me that they were making lots of money in the Yen and Yen based pair FX trades that I noticed the Yen has started to move on Friday in the direction of the 3C accumulation.

Both carry trades fell as well...

 USD/JPY on Friday

EUR/JPY on Friday as the Yen was rising.

Remember, a rising pair is supportive of the carry trade, a falling pair can be disastrous. Remember these charts and compare to the SPX's trend (don't forget the changes in character as well as volatile moves up seem good, but are often the last thing before a top/reversal-just look at tops and the trend preceding them)

 EUR/JPY's daily trend

USD/JPY's Daily Trend...

I'm going to post this now and let you chew over it, I'll post the rest of my findings later today...