Nikkei - 12th November 2014

Nikkei 225

The context
Japan has been fighting deflation since the beginning of the 1990s. I personally question this strategy. Japan's economy depends on research, innovation, and exports. After the USA rigged the game with the Plaza Accord to send the Yen higher, even though they had been praising free-floating currencies (only when it's good for them, we know that now), Japan has been trying to keep the yen as low as possible. And it is deflation that allowed Japanese banks to lend at very low interest rates: how can you charge 0.1% if inflation is at 2%?! And will Japan's fantastic investments in R&D and innovation continue if companies have to pay 3 or 4% rates? We'll know the answer in the coming months/years.

Now the Bank of Japan's target is to push consumer price inflation over 2% by 2015 (which it achieved not) while supporting economic growth (which it achieved not). To be fair, the average core consumer inflation in Japan this year is 2.8%, but it was shown that if you trip out the effect of April's consumption tax hike (5 to 8%), inflation is actually 1%... Anyway, the BOJ is targeting these goals and to this end it is running the largest quantitative easing program (central bank purchase of debt and equities, JGB, ETF, REIT etc) in Japan's history, with over $730 billion per year.

The mechanics are simple: pumping cash into financial institutions while pushing bond yields lower encourage finance guys to invest in stock markets. Hence the Nikkei going up big time. The GPIF (largest pension fund in Japan) has announced that it will raise its holding of domestic stocks to 25% of its portfolio from the current 12%. 
So you understand that there is no such thing as free market or invisible hand or demand/supply law, but a strong government will to push the Nikkei higher by all means necessary. I'm not judging it, but what I say is: don't fight against Abe, the BOJ and GPIF. They have more cash than you.

Between 2001 and 2006 the BOJ, through a smaller-scale QE, pushed the Nikkei over 18,000 where it was rejected violently in July 2007, maybe to make a higher low in March of 2008 but then Lehman Bros flushed it to the toilet. The Nikkei has been rising since October of 2012. Then it recently breached an important resistance that rejected it in March 2000 and July 2007. Now, at 17,100, it is above a big declining trendline but approaching the turbulence zone of the 18,000.

How does the Nikkei concern you? Well, the Yen is correlated inversely to the Nikkei, so when Nikkei is up Yen is down (so USDJPY is up). Which is pretty cool because analyzing this index helps your trading on many interesting pairs which are volatile and interesting to trade.

On the daily chart

• Direction: up > higher highs+higher lows, above 200 moving average
• ADX: 45 and rising
• Ichimoku: up > cloud is blue and rising, tenkan line above kijun line, chinkou line above price, price is far from kijun line (risk of a small correction)
• RSI: 66, close to overbought

Today's action
On 3rd November the Nikkei was rejected at 17,440, and then again yesterday. You are clearly looking for a buy opportunity here, but current levels are approaching strong resistance and I'd rather not place a trade here.



One more thing.
Bernard Baruch said:

"Don’t try to buy at the bottom or sell at the top. This can’t be done, except by liars."

RSI or MACD divergence and other crystal ball techniques that can predict that a change in the trend is coming look yummy. You imagine yourself selling at the top where everyone else including George Soros and his grandmother bought the top. But that never happens. That's dangerous because you don't trade what you see but what you expect to see.