In my October 29, 2012 commentary I wrote that I was starting to “sit up and take notice” of Japan in general and the Nikkei in particular. The Nikkei appeared to be on the cusp of a new bull market and market action since then has confirmed that suspicion. As the US appears to be in a bear market (timed by George Lindsay’s Three Peaks and Domed House pattern) this can present grave difficulties for long-only money managers. Japanese equities should provide, more than just a safe-haven, but a profitable investment. But what is causing a bull market in an otherwise moribund economy? The answer is found in the Japanese Yen.
After years of failed attempts to stop the appreciation of the Yen, the Bank of Japan appears to have finally been successful in halting its rise and a new bear market in the Yen is underway. A falling Yen equates to a rising equity market. While a bounce in the Yen is due this week, ominous clouds are on the horizon as a massive head-and-shoulders top is on the verge of being triggered. A breach of last Friday’s low will trigger that topping formation.
A head and shoulders price target is determined by the distance from the top of the head to the neckline. That neckline has yet to be broken but if it were to be breached at last Friday’s test, then that would call for a minimum move by the Yen to 107. For those willing to short a currency market, short-Yen could be a very profitable position.
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