Japanese Yen and Nikkei: The Reversion That Refreshes?

Even when major reversal candlesticks appear after a prior, steep, and established uptrend, there is no guarantee that they will cleanly confirm lower within a reasonable period of time to cement a major top. However, you can usually expect a noticeable uptick in gaps to each direction along with increased price ranged and volatility until either the reversal is confirmed or negated. That type of changing market environment is what we are seeing in Japan, even if it turns out to be a good buying opportunity in the coming weeks–For traders, there is indeed great value in sidestepping the initial whipsaws. 

With this in mind, here is just one subsection from this past weekend’s Weekly Strategy Session on Japan, where we were looking for this type of action in the NIkkei and Yen. I recognize that the week is not over. But, so far, the reversal weekly candlesticks in the Nikkei and FXY from last week are clearly still in play. 

3. In Addition to the U.S. Markets, Expect More Volatility in Japan; Emphasis on a Reversion Trade 

The Japanese Yen has been incredibly weak for many months, while the Japanese equity market has been now-famously strong. Over the next few weeks, I am looking for a sharp reversion in both markets. It has been argued that Japanese equities and the weak Yen may have been leading world markets higher, including the U.S.. So, that is all the more reason to monitor what is happening in the Land of the Rising Sun.

As evidence of potential reversals in both equities and the currency, first consider the FXY, ETF for the Japanese Yen. On the weekly timeframe, below, note the head and shoulders bearish topping pattern which confirmed with a vengeance late-last year. Last week, however, after a steep and established downtrend, the Yen printed a bullish engulfing weekly candlestick on very heavy volume. I still expect huge gaps either way and volatility, but upon upside confirmation I will be looking for snapback strength in the heavily-shorted Yen.

Now here is a closer view of that same chart, just to magnify the bullish engulfing candle and associative volume.

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Turning to the Tokyo Nikkei Index, Japanese equities printed a massive bearish engulfing candle last week. Again, without downside confirmation this type of volatility essentially amounts to “noise” within a strong uptrend. But given how steep and exuberant the rally has been in Japan, we would be remiss not to take seriously the potential for a sharp reversion, down to around 13,000, for example.

The overarching trends, higher in the Nikkei and trend lower in the Yen, are not under assault from a long-term view, looking out months and quarters. But the probability of a ferocious snapback in both markets is to now be taken very seriously in the coming weeks.

Interested in learning more about the Weekly Strategy Session? Please click on that hyperlink.