SURGING YEN WEAKENS NIKKEI -- BUT THE FALLING DOLLAR CUSHIONS JAPANESE ISHARES -- GOLD AND SILVER ARE TAKING WELL-DESERVED BREATHER
YEN SURGES ON CALL FOR HIGHER ASIAN CURRENCIES ... Last week we saw the Euro hit a new 2006 high. Today it's the yen that's jumping. Over the weekend, the Group of Seven called for Asian countries to let their currencies rise to their true market values. While the call was aimed primarily at the Chinese, all Asian currencies moved higher today as a result. The most dramatic move was seen in the Japanese yen which rose more than 2% against the U.S. dollar. Chart 1 shows the yen gapping over its 200-day moving average. That sets the stage for a test of its January high at 88. This is a logical time for the yen to move higher. The monthly bars in Chart 2 show why. The yen is bouncing off a major support line drawn under its 1998 and 2002 lows (see arrows). Its longer term pattern looks more bullish than bearish. The last time the G7 made a major call for higher Asian currencies was in September 2003. That began a yearlong climb in the yen (see circle). From a currency standpoint, that puts even more downside pressure on the Dollar Index which is threatening its 2006 low. On a short-term basis, however, the falling yen caused some profit-taking in the Japanese stock market.
Chart 1
Chart 2
RISING YEN WEAKENS NIKKEI 225 ... Although most global markets were in the red today, Japan suffered the biggest loss. The Nikkei 225 fell 489 points (-2.8%) to close at 16914. The daily bars in Chart 3, however, show it still trading well above its 50-day moving average. The reason given for the selling was that a rising yen might cut into Japanese exports. The fact that the Japanese market is in an overbought condition didn't help either. The monthly bars in Chart 4 show the 9-month RSI in the most overbought condition since 1990. Having said that, however, the chart also keeps us from getting too worried about Japan. The Nikkei appears to have broken free from the major downtrend that lasted from 1990 to 2003 and the major deflation that contributed to that downtrend. My next major upside target for the Nikkei is the early 2000 peak at 20,800. While it may be due for some short-term profit-taking, I still happen to view Japan as the best value among the world's major developed stock markets.
Chart 3
Chart 4
FALLING DOLLAR CUSHIONS JAPAN ISHARES ... It may seem strange to some readers that the Japan iShares (EWJ) lost only .50% today while the Nikkei lost almost 5%. Actually, it's not strange at all. As I've explained many times, the difference between the two is tied to the direction of the yen. While the Nikkei is quoted in its local currency (the yen), foreign ETFs (like the EWJ) are traded in the states and are quoted in U.S. dollars. Since the EWJ is quoted in dollars, it's value rises as the dollar falls. Today's 2% gain in the yen, therefore, cushioned the drop in the EWJ. The daily bars in Chart 5 show that today's EWJ loss was relatively minor and hasn't caused any chart damage. It's still trading over the 20-day average (dashed line) and is well above initial chart support along the 14.30 level. It is, however, showing some negative divergence on the 9-day RSI and the daily MACD lines. That suggests that the EWJ may be in for some short-term volatility. That volatility, however, is still within the framework of a major bull market. It's possible that the recent setback in gold and other precious metals (which have been highly correlated to Japan) may be contributing to some short-term profit-taking.
Chart 5
GOLD AND SILVER NEED A REST ... A number of technical factors -- combined with recent volatility in gold and silver markets -- suggest that both are in need of a rest after their recent spectacular advances. The next chart may look somewhat unusual, but it carries some short-term warnings. The chart uses daily "candlevolume" bars. Candevolume bars combine price and volume activity. The width of the candlestick is determined by that day's column. Look at the big red candlebar from last Thursday for example. Notice how wide the candlestick is. That means the bearish candlestick took place on heavy volume (the heavier the volume, the wider the candlestick]. You can confirm that by looking at the big red volume bar at the bottom of the chart. In addition, the 20-day Commodity Channel (CCI) Index is threatening to slip below 100 which would be indicative of a short-term top. The MACD lines are starting to converge, but remain bullish. As I suggested last Friday, the first level of chart support is at last Thursday's intra-day low of 60.44. The 20-day line is just below that. Although all gold measures are giving overbought readings, that's not unusual in an ongoing bull market.
Chart 6
SILVER PULLS BACK ... Silver had a much more spectacular ride last week. The daily bars show that it started with last Thursday's huge selloff. Friday's bounce was followed by more selling today. Given the fact that the price of silver has doubled over the last six months, a pullback isn't that surprising. The price of silver is still well above its 50-day moving average which suggests that it's still in need of more backing and filling. Two other technical indicators show short-term deterioration. The 20-day Commodity Channel (CCI) Index has fallen to the lowest level in two months. And the black ADX line has turned down for the first time in nearly two months. Neither is a sign of a major top. Both are, however, signs of a market that's come too far, too fast and is in need of a breather. I suspect that's all that's happening here. Sharp runups are often followed by sharp pullbacks. The major trend of both markets, however, is still upward. One of the factors supporting their bull markets is a falling dollar. Today's jump in the yen is going to make the dollar even weaker and should help cushion any selling in the metals markets.
Chart 7
