Yen in consolidation mode - apparent breather before next move up

The yen has been in consolidation mode, and there's no indication that it's doing anything other than "taking a breather" before its next move up. The monthly chart shows that the steep move up can so far be counted out in two waves that are almost exactly equal in length - this is often an area where traders will take a look to see if that's it, or there's enough strength for the asset to continue the move. Looking at the daily chart, we can see that the consolidation since the recent highest point looks very much like a triangle of its own.

I've marked a red line at the 105.70 low that the yen should not fall under, if this is to remain a bullish triangle consolidation. Note also that this sideways consolidation is occurring around an apparent pivot level that also corresponds to the 111.49 Fibonacci number we identified recently as the .786 retrace of the yen back to its highest point as shown on the monthly chart (below).

There's also a point of view that the yen correlates with the movement of the VIX, which seems valid to the extent that both the yen and the VIX will tend to move inversely with equities. Similar to the ways in which gold, the dollar, and bonds will often (not always! but often) move inversely to equities. In the case of the yen in particular, it would seem reasonable to find it inversely correlated to the Nikkei stock index.

Here are the daily, weekly and monthly charts of the Nikkei. While some indicators have faint positive signs, clearly associated with this index' recent consolidation of its own, the majority of the indicators across these time frames look like it remains entrained in the downtrend:

Can the Yen go any higher? Fibonacci says to watch out

The Japanese yen has been on a tear, climbing very steeply to relatively new highs. Is it topping out or could it go even higher? Let's take a look. On the monthly chart, we see that the .786 retrace to the 1995 highs was at 111.49. This Fibonacci level is a key level from which price can reverse trend - in this case, meaning that the yen would reverse to the downside. This is one example of a "double top." So currencies traders and others who use the yen as an indicator should keep an eye on this. Alternatively, if price continues above this Fibonacci level, then it signals that it's likely to proceed upward and go higher than the prior swing high. Sometimes price will hesitate and start to reverse downward, but then move up above the .786 retrace level again. In my experience, this is a very telling sign that price has decided not to be "bound" by the .786 retrace as a resistance level.

When we look closer at the daily chart, we see that the Yen price did move above that level on the daily bars, then dropped below it ... but then moved above it again and now looks in a small consolidation pattern. In fact, you can also see that the 111.49 level has been acting as a pivot since mid-December. It's reasonable to think that as long as price remains above this pivot, or at least remains within the uptrending channel I marked on the daily chart, then the yen can continue on up to yet higher levels. While some of the the indicators are signaling it's starting to be overbought, it isn't greatly so; and for that matter, an overbought condition can be worked off with a sideways consolidation.

Another factor that warrants caution would be the steepness of the uptrending channel, when you see it on the monthly chart. However, that also can be worked off with a consolidation, and does not in and of itself mean that the yen price "must" reverse.

All in all, there are reasons to think that then yen's move upward still has room to go.* But of course, if it loses that 111.49 pivot level, then we could see a significant pullback or something more bearish for the yen. So keep an eye on that.

What about Japan's Nikkei stock index? Well, I'm posting some charts at my UBTNB3 site on that ... I find that a little sobering, so it would take a good fundamentals economist to either explain away my concerns on that index, or correlate what's happening there to the movements of the yen itself.

*Update 10:53 pm - Looking again at the chart, it can have traced out a large Elliott Wave triangle and now be moving up in a fifth wave thrust from that. If that construct holds, then the projected target is 135.88 (based on the range of the widest part of the triangle (the drop into the wave A low), added to the wave E point). Yes, that does seem very high! But then again, a logical Fibonacci target at the 1.272 extension of that range (the drop into the low at 68) would be 138.38, pretty close and nice confirmation.

We could also look at the 1.618 extension - less likely, but worth knowing - it would be just above 157. Another very common Fibonacci target would be the 1.382 extension, leading to 144.46 - which is also a lovely Fibonacci number (144). Still ... I like the confluence of the conservative 1.272 along with the Elliott Wave fifth-wave thrust target ~135-138.

In the meantime, the daily chart's channel gives the suggestion of a diagonal which if valid would see the current upward movement stall out at 117.69 or up to 120.95. Arguing against this being an ending diagonal, however, is the lack of a wedge shape. So it will be interesting to see whether the yen reacts to that range of 117.69-120.95 at all, or not. But - first we've got to see the yen move higher, for any of this to "work"! So let's see if the yen stays above the 111.49 pivot first, and then can vault to these higher levels.

PS - interesting article http://seekingalpha.com/article/116724-japan-s-grim-and-bear-it-2009-outlook at Seeking Alpha regarding Japan.

Good reading

Good article to read, posted at Minyanville (you can find in links under "other sites of interest", right side of this page) yesterday - here are some parts of it:

Jeff Saut: Short-Term Uptrend for S&P 500
MV Respect Dec 22, 2008 10:30 am

... But sustaining it is like walking a tightrope.

Editor's Note: The following article was written by Raymond James Chief Investment Strategist Jeff Saut. It has been reproduced with permission for the benefit of the Minyanville community.

Winter officially began yesterday morning, with the arrival of the winter solstice. Recall that solstice means “standing-still sun;” and on December 21st at 7:04 a.m. (EST) the sun “stood still” over the southern Pacific Ocean (Tropic of Capricorn). At that time the sun’s rays were directly overhead, giving the impression that the sun was truly standing still.

.... I paid tribute to this year’s “turning point” by facing the sky and screaming at the top of my lungs. It was one of many such screams emitted over the past year, as we watched the S&P 500 (SPX) lose nearly 52% of its value since October 2007. However, my sense is that the economy, and the various markets, are near a turning point.

That sense is driven by last week’s slashing of the Fed Funds rate, which will allow it to “float” between zero and a quarter of 1%. The operative word here is zero, as the Fed is effectively offering the banks “free money.”

With the Fed Funds target rate down to the 0-25 basis point level, the Fed is now “out of bullets” with regard to conventional monetary policy. Consequently, the Fed felt compelled to announce that it “will employ all available tools to . . . preserve price stability.” As Bloomberg Television put it, “The Fed is all In!” “All In” indeed: It now appears the Fed is moving to influence other interest rates. ...

To be sure, this Fed is being much more aggressive than the Bank of Japan following Japan’s “bubble bust,” as well as more aggressive than the Fed of this country’s Depression years. I think the Fed will be successful in getting private-market interest rates down and asset prices up.

Accordingly, I think last week’s Fed action will mark a “turning point” for the real economy, and would argue the equity markets tend to lead economic turning points by roughly 6 months.

Since the typical recession lasts 18 months, a 6-month economic “turn” from now would jibe with the NBER’s recent revelation that the current downturn began in December 2007 (12 months ago, even though we still haven't experienced 2 negative quarters of GDP).

Moreover, in addition to my firm's oft-mentioned metrics for a better equity market since the October 10th capitulation “low,” the ensuing downside devastation recently left the S&P 500 (at its nadir) a massive 34% below its 200-day moving average (DMA).

Ladies and gentlemen, the last 2 occasions that the S&P 500 exceeded the gap of 25% below its 200-DMA was in October 1974 and October 1987, both of those readings were at major market lows for the indices. Their subsequent advance was more than 50%.

Given all the previous mentioned reasons for my firm's “call” to gradually re-accumulate stocks, in some cases using hedge strategies, we now add Kiplinger’s 6 Reasons to Buy Stocks Now:

1. Stocks are battered and cheap.
2. Stocks are overdue for a rally.
3. The low-risk alternatives are pathetic.
4. It’s not the 1930s.
5. The market shows signs that the worst is over.
6. If not now, when?

Plainly, I agree, and would note that even though the flow of news has become materially worse over the past few months, the DJIA is not much changed from mid-October. .... Just as investors were conditioned to believe that any decline wouldn't gather much traction back in 1999 and 2000, they're now being conditioned to believe that any rally isn't sustainable.

Meanwhile, last week the Volatility Index (VIX) closed below its November closing low of 47.73 and the Russell 2000 (RUT) tracked-out above its 50-DMA (at 481.45). If the DJIA (8579.11) can likewise break out above its 50-DMA at 8702, the Dow’s November 4th reaction high becomes the next upside target.

Bettering that high, with a like move from the D-J Transports, would register a Dow Theory buy signal; the first such signal that would come from “cheap” valuation levels in more than a decade.
... Unsurprisingly, given interest rates, the Dollar Index lost 2.8% on the week; yet we think the worst of the dollar’s recent decline is over since the ECB will likely have to lower rates as the European economies sink deeper into recession. Surprisingly, given the dollar’s weakness, crude oil fell a shocking 26.8% last week. Hereto, I'm of the view that oil is bottoming, as these prices should cause China to increase its strategic reserves.

Still, Asian asset classes are the real beneficiary of a falling US dollar and low oil prices, which is why my firm is long the iShares MSCI Japan (EWJ) in the ETF portfolio. And this morning we're adding iShares FTSE China (FXI).

The call for this week: I'm leaving for the nation’s capital, so these will be the only strategy comments for this holiday-shortened week. Nevertheless, as my friends at Bespoke note, “The S&P 500 remains in a short-term uptrend that formed off of its November 20th lows, although it’s walking a tightrope to maintain it.”

Obviously, I agree ...
Merry Christmas everybody.