Diary of a Financier

Japan about to take the fork in the road

In Capital Markets on Thu 29 Aug 2013 at 11:39

Herein, I’m updating a string of posts on Japan, in which we’re still long positions in the Japanese ETF ($DXJ) and Sony ($SNE)–the latter of which has been cut in half for idiosyncratic reasons.

Back in July, I noticed a familiar chart pattern developing in Japan’s NIKKEI index. I was reminiscent of numerous momentum boom/busts throughout the years, namely China’s Shanghai. I was admittedly skeptical, and I did a lot of research to affirm/disprove the theory before choosing sides, including a search for a signal that could’ve triggered the breakdown.

In my subsequent due diligence, a number of inconsistencies cropped-up. First, $USDJPY charts appeared bullish (bearish $JPY). Then, $DXJ held trendline support of a bull pennant that was part of a larger Cup & Handle formation. That second point started to break-the-back of my bearish Shanghai analogue.

Both the NIKKEI itself and DXJ have since retested (and successfully held) their trendline supports in a second pass. The short term bull pennant has coiled into a vertex, portending an imminent breakout–lest the classical pattern fail. The bias is certainly toward the bull camp, particularly given the larger, overarching C&H:

DXJ daily/weekly

DXJ daily/weekly

Further, USDJPY still looks ready to rally up to its long term bear channel’s trendline resistance ~105–a weakening of JPY that aids local equities:

USDJPY weekly

USDJPY weekly

I plan on doubling our DXJ position from 2% to 4% were we to get confirmation of a breakout.

–Romeo

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  1. Japan CapEx reading could lead to upward GDP revision | Market Currents (Seeking Alpha)
    Japanese capex +2.9% q/q.
    Capital spending unchanged y/y in Q2 vs -2% consensus & -3.9% in Q1.
    Corporate current profits +24%; corporate sales -0.5%.
    JPM & UBS say Q2 GDP may be revised up from a preliminary reading of +2.6% following the capex data, which could make the government more inclined to go through with proposed increases in sales tax. A decision is expected early next month.

    http://seekingalpha.com/currents/post/1255542?source=feed

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