Quick USD/JPY Update

The carry pair has been flat or in a consolidation triangle since noon, that and HYG's performance, no SPY Arbitrage today, the fact that Cross Asset Correlation was DEAD today as well as the diagonal trendline with no significant pullbacks tells us today was a short squeeze, there's a lot of momentum (if you read the articles on Head Fake moves on the members' site) that comes from a failed move, but these moves that appear by price alone to be failed moves are anything but, these are planned out long in advance.

One of the earliest (not the earliest) of a head fake move was in this post, "Come Monday"  from Friday, January 31st.

This was late day Friday post for what to expect Monday which said...

"In the end I had to go with what I know to be the highest probability concepts and those were all confirming. There were a lot of minor elements (which may be major elements by now or by the time futures close) such as the way High Yield Credit was acting or Treasury Yields, Gold's signals were a big one, the outperformance in VIX short term futures, the 5 min charts of the Index futures (usually these are very clear with a move about to take place-they were lagging more toward a downside move, but not very strongly which would indicate a head fake move as it's not real distribution), the hum-drum sentiment indications, the currency futures were not making a lot of sense, but those were 1 min charts and they rarely will make it through a weekend, but the longer 5 min charts which will last through a weekend, did make sense."

On Monday, Feb 3rd we got the start of that move...

"F" is for that Friday from above, "M" is the head fake move expected Monday which was only a head fake move because there was a defined range of support from the previous week. "S" is where technical traders will place their "Buy to cover" stops as they believe resistance will hold. Technical traders will short a break of that support, that brought in a lot of shorts.

Ultimately though we need to differentiate between a real break down and a head fake move, I already suspected a head fake move because of the way the market uses Technical Analysis against traders and the fact we already had accumulation in the range. As I said in Friday's post from Jan 31st above, "it's not real distribution". 

We were able to identify accumulation pretty quickly telling us it was a head fake move and not a real break down that would lead to significant new lows, instead it was a bear trap, thus the reason the trading portfolio was leaning all long until this week.

This is a 15 min. chart of the SPY backed up to the Monday break and the proceeding evidence of a head fake move as you don't see accumulation in to a real downside break.

There are a lot of reasons to run a head fake move in EVERY TIME-FRAME, but this is one of the easiest ...Doing some VERY ROUGH, back of the napkin calculations based on where we know accumulation was taking place...

If you average the range and the head fake together you get an average price of about $176 very conservatively, probably closer to $175. Just as important for a Wall St. firm, you have a position in size, the head fake move allowed them to accumulate at lower prices as short selling creates a lot of supply easily accumulated and at much cheaper prices and allowed them the supply they need to put together a position this size without alerting anyone, it's classic head fake.

That means once you break above the lower red trendline (resistance that traders expect to hold and thus place their stops just above) anything above $175-$176 is pure profit and with a short squeeze there's plenty of demand to sell your accumulated position in to at higher prices. I'd say a good 50% of the market is HFT that make their living scalping a few cents here and there thousands of times a day, so a $5 or $6 gain is big business, but this is just part of the reasons these head fakes are used.

We've seen the distribution pick up significantly recently, last Thursday as the market broke above the red trendline, 3C action was dead, it makes sense because they wouldn't have been accumulating anything, that was already done and they wouldn't have been distributing anything as the move was just moving in to profit. Thursday/Friday was a different situation entirely and distribution picked up heavily and even worse this week, that's not only selling the longs they accumulated, but going short in to higher prices because in to a short squeeze the one thing they  (institutional money) need to sell short in to (it's the same as the head fake move, just in reverse) is higher prices so their size doesn't drive prices down against their position and demand which is easy to get in a short squeeze.

I suspect there are some mass psychology issues at play here too. Retail has spent the last several years with the motto, "Buy the Dip", that was convenient for banks like Goldman Sachs who were putting nearly risk free QE profits in the market every other day and as such, had numerous quarters without a single trading day loss, however times are changing as are their needs. I suspect there will be a couple different phases, at least until the carry trade is completely unwound and it seems like it's moving more in that direction. Make no mistake though, the market is a zero sum game, they aren't your friends.


As for the USD right now, it's looking precarious, it had to be held up as much as possible today as to not ruin a squeeze, but it doesn't look like it wants to be there.

After the Yellen volatility at 8:30 a.m. we have a small positive divegrence in the USD/JPY which supports the market, actually the market typically follows it as it is the carry trade and where the greatest losses can be felt at 100:1 leverage. However, since noon time the pair stayed in a triangle and didn't make higher highs with the market, thus the feel that it doesn't want to be there, meaning those who still have carry trades open want to buy the Yen back and close the trade, but that would drive the pair lower and pressure the market lower.

We can see a clear negative divegrence in to the afternoon and as of THIS moment, it looks to be losing ground now that regular hours are closed.

Here's a look at what a head fake move (which created a short squeeze as it was a large bear trap) is capable of and about just how far out of whack ES is with it's natural correlation.

The USD/JPY is the green/red candlesticks and ES (SPX futures) is the purple line. As has been the case for a long time, ES is in line with the carry cross through the range "R", the head fake move "HF", the "W" base and then we get the short squeeze as stops are hit on a break above resistance of the range.

Again, this is some quick calculations, but I have ES overvalued by nearly 40 points just going by the normal correlation and I know that the market is not "truly" turning bullish.

As for HYG, it has been used recently although HY and IG credit has been running the other direction (down) to prop up the market as it is been used so often over the last year, that looks to be coming to an end. 

Probably the most amazing thing most people wouldn't notice is how well VXX and UVXY held up today. ES's next significant support zone below is $1812.25 (apparently our question from yesterday is answered as to whether they were shooting for SPX $1800 as I suspected from HYG's use at the close or whether they were trying to make it look like resistance, it's a whole/centennial number which means it's a psychological trap where a lot of orders would be congregated.


In any case, I have updated and am going to look around and see what else out there might be interesting. As I said last night, I don't think Wall St. is going to let the 200-day moving average (SPX) just break and let the market fall lower, this is a major Technical tool and a very predictable one, it's really their chance to set up the greatest head fake of the year, likely of this entire cycle, but I think we are going to need to see what 3C does as we approach or move under it to determine what the plan is.