Tuesday, September 29, 2015

Own DAX and Nikkei Over SPX

The Nikkei fell over 4% overnight and has lost 19% from its mid-August high of 20946.  The chart looks devastated and bound for additional losses.  The gap lower suggests selling strength and the break below the early September low offers similar conclusions.  Finally, above average volume in the trade indicates it attracted some position adjustments. 

Looking a little further back in time, we would note a bullish window that remains open from October, 2014.  On the last day of that month, the Nikkei closed at 16413.76 and re-opened at 16732.85 on the 4th of November.  That window is only 3% below today’s closing level and is expected to act as support.  

Interestingly, the DAX has a similar history.  Back in October of last year, the DAX too created a bullish window that has remained open, offering support at the October 29 open level of 9139.  Today, the DAX gapped lower on open and was within 2.2% of the bullish window base.  Today’s low breached the low from August 24th and this would have created some concern for bullish participants.  

Still, the proximity of the bullish window is expected to offer considerable support and we would suggest one consider bullish positions in the DAX and Nikkei against short positions in the SPX (S&P 500) Index. 


Considering the S&P Index, we note that the decline of 12.5% from the high is considerably less than the drop of 19% in the Nikkei and certainly the 24.5% in the DAX.  However, looking back to similar support levels that the DAX and Nikkei still enjoy, the S&P does not have that October 2014 bullish window any longer.  It enjoyed the benefit of support from that small window at 1994.65 for only 6 weeks before succumbing to selling pressure on high volume. 

The support levels that the DAX and Nikkei enjoy only 2-3% from current levels is not enjoyed by the S&P whose next tentative support is as low as the February 1773 bullish window some 6+% away from current levels.  It should also be noted that even a further 6% correction from here would not yet match the decline seen in the Nikkei. 


A strategy that involved a currency hedged, dollar weighted short in SPX against a long position in the combination of DAX and Nikkei should be expected to perform well over the short to intermediate term either in recovering price action with DAX and Nikkei outperforming or in weaker price action with the SPX underperforming. 


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