I just updated my technical analysis of Japanese capital markets, but we’re on the brink of a major resumption in the rally prompted by Abenomics, so this deserves its own entry…
The Japanese equity market in particular has developed into a fantastically bullish setup. The Japan currency-hedged ETF ($DXJ) has coiled with wide swings into the vertex of a daily, long term, bull pennant. This is the primary pattern I’ve tracked for over a year now. Now bouncing-off trendline support, it’s heading for trendline resistance ~$48.5 before a breakout to $54 flagpole resistance — all aided by 3x bull divergence.
Within DXJ’s pennant, you’ll notice its potential risk, a Head & Shoulders with $45 neckline. However, given the larger, overarching pennant and the fact that the H&S is not at highs, this construction is more likely a fulcrum bottom, as opposed to a H&S top.
That logic is confirmed by the Yen ($JPY). Having failed to sustain its breakout over its own daily, long term, bull pennant’s flagpole resistance @ 104, $USDJPY is ready to breakout of a complex fulcrum bottom after bouncing-off twin support, marked by its neckline and 50DMA.
Were the expected breakout to materialize, it would be welcome news for Japan, whose NIKKEI ($NK225) benchmark trails all developed markets @ -11% ytd (DXJ -7% ytd).
We are long Japan via a 3% $DXJ allocation (down from 6% in December) and a small remnant of a Sony ($SNE) position.