Monday, January 13, 2014

Coming of Age-Nikkei Unfriendly Surprise



Coming of Age-Nikkei Unfriendly Surprise

On December 3, I asked the question ‘What Pattern Marks Nikkei ALL TIME HIGH?’.  If you recognize your candlestick charting patterns, you can find out below if you would have guessed correctly.  As it stands, the pattern I had shown on that date indicated a level of indecision as prices approached the May 23, 6yr high of 15942.  The proximity to that target resistance combined with indecision prompted warning of forthcoming declines.  The Nikkei proceeded to back off over 4% in the coming days. 

More recently the index has recovered and moved to new 6+ year highs.  However, the last session of the year (Dec 30) formed a bearish ‘hanging man’, an additional indication of indecision at new multi-year high.  The initial session of the new year appears to have confirmed the bearish implications of this reversal.  On Friday the index opened right at support from the previously noted Dec 3 closing level and less importantly at a bullish trend line dating from Nov 8.  



It appears that an important risk at this juncture could be forming an ‘island top’.  If the Nikkei open on Tuesday at or below 15785 (roughly 0.8% lower from Friday settle), and closes also lower than that level, an island top will have formed.  

The calendar in Japan this week offers Nov. current account deficit on Tuesday, machine tool orders on Wednesday and BOJ Kuroda meeting with BOJ branch managers on Thursday.  There is a possibility for any of these calendar events to influence Nikkei price action.  However, one might wonder what intimate family conversations are taking place today on the ‘Coming of Age’ holiday in Japan.  Is the newly acknowledged mature family member able to support himself or are mom and dad preparing for a longer physical transition to independence.  If the latter, one might imagine less bullish prospects for the Nikkei over the near term.   

From December 3
----- Original Message -----
From: MARTIN MCGUIRE (TJM INSTITUTIONAL SE)
At: Dec  3 2013 09:34:18
Trivia Question; What Pattern Marks Nikkei ALL TIME HIGH?
If you guessed that on the December 29, 1989 all time high session, the Nikkei formed a ‘doji’, you would be correct.  By exacting definition, a ‘doji’ is represented by matching opening and closing prices.  On that late 1989 date, the opening and closing price deferential was only 2.75 points (0.0000707 of underlying) and for the ‘art’ of technical analysis, I am comfortable in calling this a ‘doji’.  



Following that doji, the Nikkei fell roughly 30% in 4 months and of course by roughly 80% in total. 

The advance to late-May ’13 high of 15942 was quite impressive for a 6-7 month charge.   Impressive as well is the 6 month recovery that brings prices back toward that late-May high. 

Somewhat disconcerting at this juncture is the successive ‘doji’ that mark the last three sessions.  The largest differential between the opening and closing price over the last three sessions (Fri, Mon and Tue) is Monday’s 4.67 points.  I looked back to 2011 on daily prices and could not find a similar set of three consecutive doji.  If you look further back you might find.



Refresher mini-Candlestick Course:  A doji is instructive in what it tells of a prevailing trend.  Generally speaking, we are inclined to find comfort in a trend that gains and defends newly won ground.  When a trend shows an inability to do this, we are called to question its strength.  One way of describing a lack of progress in a trend is by a doji session.  Sometimes a doji can appear as a result of a higher settlement price and this can confuse many that the trend is still strong. 

However, in the case of a doji, the tight differential of matching opening and closing prices indicate an extreme level of indecision.  We charge this indecision against the contingency which is beneficiary of the prevailing trend…at this juncture for the Nikkei, clearly the bullish contingency.  Conversely, the contingency that have been fighting the prevailing trend cannot be charged for the indecision because it is right and good to be uncertain when in the middle of the street dodging or getting run over by traffic.  However, the bullish contingency has no reason other than lost conviction to be indecisive and thus is found the responsible party. 

A bearish candlestick session or even three consecutive similar sessions is nothing without a confirmation.  In the first two sessions of 1990, the Nikkei fell 1.6%, helping to confirm the bearish implications of the year-ending doji.  We would do well to watch closely the trade over the coming sessions in the Nikkei to see if the recent doji sessions have similar bearish implications. 

I’d be interested in learning when the last time the Nikkei showed three sessions of similarly small open/close differentials if someone felt like running a spreadsheet. 

Regards, Marty

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