Pimp My Trade

Short Japan! (But wait for a rally)

Posted on February 18, 2009 by Adam

Japan is in an interesting situation. Now, I am not big on fundamental analysis, but when I notice technical themes that happen to match up with fundamental ones, I take notice.

Right now I’m seeing a lot of interesting price action in the currency market. The Japanese Yen is no exception here.

Take a look at this point and figure chart of the FXY, which is an ETF tracks the JPY/USD currency pair. The stronger the Yen, the higher this instrument goes.

The point and figure chart shows the Yen. Notice how the Yen is sitting at a very interesting support level - a long term bullish trendline and a recent previous low.

The Yen has pulled back recently, given strength in the Dollar, but that doesn’t change the context of the long term trend. Everything on this chart tells me the Yen wants to go higher. Given the trendline and prior low support, my money is on the Yen going higher.

I don’t do much trading in currencies, although you don’t need a forex account to trade the FXY - it’s an ETF. In any event, I’m looking to capitalize on how equities respond to movements in the Yen.

I’ll put on my fundamental analysis cap for a second - bear with me. As the Yen goes higher, we should see Japanese stocks go lower. A strong currency is bad for Japan since they do so much exporting. The stronger the Yen, the more expensive it becomes for buyers to do their business in Japan. When Japanese companies have to deal with that obstacle, they are likely to go lower.

From a technical perspective, my favorite Japanese stock to trade this would be Kyocera, (KYO: 89.64 0.00%).

Look at the beautiful head and shoulders that confirmed this week. Can you guess where I want to short it?

Kyocera exports a ton of electronic equipment, and I would expect them to get CRUSHED by a higher Yen. If we see a rally in equities and the Yen holds support, we should see a rally in KYO up to retest the neckline of this Head and Shoulders Pattern.

I would love to short KYO at 65, but now is not the time. There is too much risk at this point. Just wait a couple of days and when we get that retest than load up the boat.

Here’s a list of other Japanese stocks, but KYO is my favorite in the group.

Happy Trading