Thursday, December 17, 2009

Currency And Country ETF: Japan

Figure 1 is a weekly chart comparing the Currency Shares Japanese Yen (symbol: FXY) to the i-Shares MSCI Japan Index Fund (symbol: EWJ). As you can see, these two instruments are un-correlated across multiple time frames.

Figure 1. FXY v. EWJ/ weekly

Figure 2 is a weekly chart of FXY. The double top is highlighted, and the break below the negative divergence bar (marked with pink) and the up trend line are bearish. This portends further weakness for FXY, and within this context, I have put a "sell" signal on FXY.

Figure 2. FXY/ weekly

If FXY is a "sell", then this would make EWJ a "buy" as these two instruments tend to move in opposite directions. If we blow EWJ out to a monthly time frame (see figure 3, a monthly chart), we note the break above the simple 10 week moving average (blue up arrows) and the test of that moving average (green up arrows), which is now rising. More importantly from my perspective, prices are breaking above a down trend line formed by two pivot high points. This is bullish. A monthly close over the pivot high point at 10.22 would provide further confirmation for higher prices. A weekly close below 9.30 would be reason enough to exit this position.

Figure 3. EWJ/ monthly

My only concern with EWJ is its high correlation with US equities. As I am sure you have figured out, I am not too enamored with US stocks without some kind of meaningful pullback that sees investors turn bearish. This would represent a better buying opportunity. Until that time, the lack of follow through in the US market may be a headwind for EWJ. Nonetheless, the technical picture for EWJ is compelling and worth watching.

No comments: