Japan's conundrum - a strong yen and a weak Nikkei

There are few trends in the capital markets which are more easily discernible at present than those relating to two key asset classes relating to Japan - the exchange rate of the yen against the dollar, usually quoted as USD/JPY and the Japanese benchmark equity index, the Nikkei 225.

The first chart below shows a weekly view of the Nikkei 225 captured after trading on Tuesday, August 31st when the index suffered a 3.5% decline to take it back to its lowest level since March 2009.



The weekly perspective from the last three years or so reveals several technical weaknesses which are worth noting:

• The index failed to overcome resistance at the 38% retracement level from the twin highs on the chart around 18,300 seen in H1, 2007 and the twin lows just above the 7000 level seen at the end of 2008 and in Q1, 2009. The 11,400 level is now a key upside threshold for this index as it represents the failure at this key retracement level as well as the 200 week exponential moving average.
  
• However from the overall configuration of the chart it would seem that the upper threshold is not on the agenda but rather the lower levels which may need re-testing in view of the clear break of uptrend lines which have been inserted with dashed lines
  
• Also pertinent is the drop below the weekly cloud formation with no obvious cloud levels to provide possible support raising the possibility that the 7000 level is now exposed as a potential target area for testing.
  

To a large extent the fate of the Nikkei is interwoven with the outlook for the yen. The inverse relationship between yen strength and Nikkei weakness is one of the most widely acknowledged examples of strong correlation, albeit an instance of negative correlation. The weekly chart below for USD/JPY, which shows the relationship of the dollar to the yen and thus weakness on the chart (i.e. lower rates) corresponds to yen strength, is yet another example of a market which is decidedly uniform in direction with an unrelenting trend downwards for the dollar against the yen.



What is striking about the chart for USD/JPY, and this underlines the value of using an Ichimoku framework for analysis, is the failure of the dollar to break above the extended cloud formation which occupies most of the right hand side of the chart. At several points, indicated by the arrows, the attempts by the US currency to break out of the persistent downtrend against the yen have failed to penetrate the cloud from below.

In summary I would suggest that since the outlook for the Nikkei 225 is so closely related to the direction of the yen, unless (and until) the USD/JPY chart can show a convincing and decisive break above the cloud patterns, and the yen can begin to retreat, the prospects for further weakness of the Nikkei, perhaps back to the 7000 level, has to be taken seriously.

Daily Form August 25, 2010

Inter-market Technical Analysis using algorithmic pattern detection

WEDNESDAY AUGUST 25, 2010       11:00:00 GMT

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It seems that almost every commentary and item of financial analysis that I came across at present is talking about metrics of historic proportions. To cite just a few examples

Yields on 10 year UK gilts and 10 year bunds are at their lowest ever.
Yields on 2 year US Treasury notes are at their lowest ever
The yen is registering highs against the US dollar not seen for at least 15 years and the highest level in 9 years against the euro
Debt to GDP ratios in many major economies including Japan, the US and UK are at their highest peacetime levels
Existing home sales, as reported yesterday in the US, are at their weakest level since 1995

And I could go on.

Perhaps the best (and most ominous) chart I can show today is the 20 year perspective on the Nikkei 225 as seen below. The index fell by another 1.7% in Asian trading but that is small change when considered to the almost 80% drop that this index has seen since the last trading day of 1989. When commentators talk about the possibility of a Japanese style deflation experience for some of the "old economies" it is worth keeping this chart in the mind’s eye.



The S&P 500 futures are currently trading in Europe within the confines of yesterday’s fairly extensive range. We should find out possibly today whether the "blip" below the 1040 level needs to be tested before any kind of relief rally can be mounted or whether the bears really are in the driving seat and ready to move into high gear.



The Russell 2000 came within 3 points of validating the comment made here this week that 585 was a near term target. The doji like candlestick is intriguing, but could well be indicating hesitation about how well lower levels have been robustly tested rather than a conviction that a rebound is now the path of resistance.




The call made here on Monday regarding AUD/CHF was timely and the suggestion is that even lower levels seem likely in the medium term. I have used the arrow to point to exactly the critical weakness point in the technical picture which was the failure to make it up into the overhead cloud formation following the break below the trend-line. Foreign exchange markets are relatively easier to discern with these kinds of patterns than the more algorithmically driven equity markets.

I just want to make reference to the trade setup which I discussed in yesterday’s column regarding CHF/JPY and how qualifications should always be made in regard to specific levels targeted. At the time of writing the pair seemed as though a move up to 81.40 would precede the move down that was anticipated. Soon after the newsletter was published the pair actually went down almost exactly to the 80.40 level without any rally up towards my proposed entry level of 81.40. In such circumstances the setup should be disregarded and not enacted after the initial target has been achieved.

Daily Form August 24, 2010

Inter-market Technical Analysis using algorithmic pattern detection

TUESDAY AUGUST 24, 2010       10:56:00 GMT

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The big event in European trading this Tuesday morning (so far) occurred just after 0700 GMT when USD/JPY dropped almost 100 pips and bounced just before hitting the 84 level. This puts the yen at a multi-year high against the dollar - a fact that reflects the unease which is also keeping the yields on several key government bond benchmarks, including the 10 year bund, at or near historically low levels.

In overnight trading the Nikkei dropped and then closed below the 9000 level and this gives rise to a real possibility that there will be concerted action from the BOJ and other central bankers to try to "manage" the situation as things could get rather ugly from here on.

S&P 500 futures are trading at present down below their close yesterday at 1056.

With one week remaining in August and US equities also sliding downwards the chart for the Nasdaq 100 looks in some ways the most vulnerable and a drop to 1750 could be a realistic target if not before Labor Day then soon afterwards.



The technical pattern on the 60 minute chart for USD/JPY is a classic break from a downward wedge pattern and since we are now in uncharted territory on this key exchange rate it would take a braver man than me to guesstimate where we go next. Clearly the BOJ will be watching developments closely and trading this pair at present is high risk in my opinion.



GBP/JPY looks set to revisit the 128 level which was seen in May in the aftermath of the wonderfully prescient "flash crash" event.



When considering two safe haven currencies, the yen and the Swiss franc, the chart below for the cross rate highlights the extraordinary strength that the yen has at present. The 240 minute chart below especially illustrates the recent topping pattern of the Swiss currency and its inability to break above 83.
Similar concerns about central bank intervention would apply to trading this currency pair right now, but it would be tempting to make a short term trade of selling CHF/JPY at the 81.40 level with a stop at 81.90 and a longer term target at 80.40 (with scaling out of the position as an appropriate tactic).

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TRADE OPPORTUNITIES/SETUPS FOR TUESDAY AUGUST 24, 2010

The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

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AAPL  Apple Computer Inc.  

Several individual stocks caught my attention from the TWF daily scanning routines and are worthy of consideration with the qualification which should always be made, that these are not specific recommendations for today's session but rather indicative of broad patterns which may bear fruit in coming sessions.

AAPL triggered an Ichimoku signal yesterday, which can be an early indicator of impending weakness, based upon the Tenkan Sen line crossing the Kijun Sen line from above. More details about this pattern are available to premium subscribers along with other useful clues provided by technical pattern analysis.





ALTR  Altera Corp.  

Altera has a clearly visible bear flag pattern which could be on the point of breaking down and the close dropped below the cloud formation.




AMCC  Applied Micro Circuits Corporation  

AMCC also has a well defined bear flag pattern.




RS  Reliance Steel and Aluminum  

One of the patterns which I scan for pays attention to those stocks which have volume which is greater than 1.2 times the 15 day moving average of volume but less than 1.5 times the average volume. These stocks could be at an inflection point and getting ready to make a decisive directional move.

Reliance Steel (RS) fits the above description and also dropped below the cloud and looks ready to revisit the recent low.




TK  Teekay Shipping Corp.  

Teekay Shipping (TK) also fits the volume characteristics described in reference to RS and also dropped out of a cloud formation.

In this case with the 200 day EMA lying less than a dollar below yesterday's close I would be inclined to wait for a rebound before looking on the intraday patterns for a suitable entry on the short side. If such an entry doesn't present itself then be prepared to move on and look at other opportunities.

Daily Form August 23, 2010

Inter-market Technical Analysis using algorithmic pattern detection

MONDAY AUGUST 23, 2010       10:08:00 GMT

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Equity markets appear to be hanging on by their finger tips to fairly critical levels. No where is this more true than in Japan where the Nikkei came within 90 points of the key 9000 level in Monday’s trading.
The index closed at its lowest level since last November and I will repeat my comment from Friday’s newsletter that a clear break below 9000 could be a watershed event for global risk appetites



I am still of the view, despite the intriguing hammer formation on the chart from Friday’s session, that the Russell 2000 looks vulnerable to a test of the 585 level.



EUR/USD is trading below $1.27 in European trading and on the daily chart has now entered the cloud formation. The annotated break of a key trend-line suggests an eventual testing of the base of the cloud formation which suggests we could see $1.2450 in coming sessions.



I shall be looking for suitable entry levels on the short side of AUD/CHF in today’s trading. The region around .9350 would seem to offer firm resistance.

The chart suggests that there is a relatively attractive longer term position play by selling the Aussie dollar against the Swiss franc on any significant rallies of AUD.

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TRADE OPPORTUNITIES/SETUPS FOR MONDAY AUGUST 23, 2010

The patterns identified below should be considered as indicative of eventual price direction in forthcoming trading sessions.
None of these setups should be seen as specifically opportune for the current trading session.
For a more comprehensive listing of price formations detected by our pattern recognition algorithms please visit TradeWithForm

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XOP  SPDR Oil and Gas Exploration  

Here again is my comment on XOP from Friday's commentary

XOP, the exchange traded fund for the oil and gas exploration sector, has dropped below the cloud formation and other technical weakness suggests lower prices ahead.

For premium subscribers there is a daily listing of key ETF's and equities which have made significant moves in relation to many key technical indicators, including those which have dropped out of Ichimoku cloud formations or emerged from such clouds in an upward direction. Notably at the moment there are very few instruments which are emerging upwards from such clouds apart from inverse ETF's.

IDX  Market Vectors Indonesia ETF  

IDX should be monitored for evidence of a third lower high.




IXN  iShares S and P Global Technology  

IXN, a sector fund which tracks global technology stocks may struggle to regain a footing within the cloud formation and will be on my watch list for this week for a possible drop down back to the early July level indicated on the chart.