Wednesday, November 13, 2013

There’s a Big Move Coming in Japan

One of the most fascinating markets of 2013 has been in Japanese stocks. There’s no doubt about it. Late last year we saw the potential for a pretty decent sized move in the Nikkei 225, but it obnoxiously exceeded all of our expectations. What we thought could be a 10-15% upside move last November turned out to be more like an 80% move over the next 6 months. What a monster that became.
The momentum chasers ripped this thing up above 16000 before the destruction eventually began. We saw a volatile 20% correction in just two short weeks – but that’s what happens after a big move like this. I would argue that the sell-off was both normal and well-deserved. During that correction in Japanese stocks, the Yen saw a monster rally. The negative correlation between Japanese Stocks and their currency has been off the charts over the last year. Apparently the central bank over there is like our Fed on steroids. But that’s not my expertise and I’ll leave that alone for now. Either way, the numbers don’t lie – the negative correlation between the two is nothing to ignore.
So here’s what’s happened since the monster rally and ensuing 20% correction: a whole lot of nothing. Less than nothing. Both the Nikkei 225 and the USD/JPY cross have been consolidating for over six months in a symmetrical triangle with well-defined converging trendlines. Here is what they look like (not a coincidence they’re mirror images):
11-11-13 nikkei11-11-13 usdjpyNow here’s the thing. When technicians look at these charts, we’re trained to presume that the consolidation will eventually breakout in the direction of the underlying trend, which in these two cases would be to the upside of course. But it’s not just us in the chart community, the fundamental guys are all over this one as well. In fact, I can’t find a single person that doesn’t think these two charts break out to the upside. It’s almost like blasphemy if I bring up even the possibility of a sell-off in Japanese Stocks or a rally in Yen.  (more)

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