Is the Yen Bottoming? What about Japanese Shares?

They say that patience is a virtue, and it likely is, but when it comes to the markets, patience is usually a necessity.

On January 23, amidst all the "Abenomic" hysteria, we wrote an article entitled, "Is it Time to Buy the Yen?"  In that article we highlighted the extremely bearish sentiment that accompanied a quickly falling Yen and rising Japanese stock market, but the key to that sentiment trade (as with all sentiment trades) was to wait for the technical trend to change before jumping on the eventual Yen bottom. In our ETF Technical Forecast published 12/30 we brought attention to the setup: "The Yen's sentiment is out of control and hit a 5 year low this past week.  The previous similar bearish sentiment extreme occurred at the March 2012 price low of $117 on the FXY (NYSEARCA:FXY) .  We can see in the charts that prices eventually bottomed on that sentiment extreme in March 2012 and rallied $10.  The key is to wait for the technicals to confirm."  Are Investors Still Extremely Bearish the Yen? But, it seems Japan is no longer the media darling it was.  Remember when Japan received all the attention and there were renewed calls for global currency wars?  Japan and the currency war discussions have been lost in the Cyprus shuffle, but currency wars are ongoing and indeed have been around as long as global trade.    The abandoning of the gold standard (NYSEARCA:GLD) in the 1930's allowed the ability to devalue currencies and make currency wars easier.  The Bretton Woods Act, just after World War 2, set exchange rates at semi-fixed levels which limited competitive devaluation (one of the act's designed purposes).  The Plaza Accord in the 80's helped the United States competitively devalue its currency as the major world economies (NYSEARCA:EFA) including Japan (NYSEARCA:EWJ), West Germany (NYSEARCA:EWG), United Kingdom (NYSEARCA:EWU), and France (NYSEARCA:EWQ) agreed to a weaker dollar (NYSEARCA:UDN).  The list goes on and on. But, just because we have to dig one level deeper to find the bearish undertones, doesn't mean sentiment isn't still extremely bearish the Yen.     If you search for "Abenomics", one of the first entries is a Wikipedia article discussing the expected inflationary economic policies of Shinzo Abe.  If having a Wikipedia entry concerning your new inflationary policies isn't mainstream and a sign of an extreme in sentiment, then I don't know what is!   Also, the sentiment measurements we discussed in our previous article on 1/23 on the Yen also remain at extremely bearish levels.   The Yen Trend is Changing                                                                Combine that sentiment extreme with the chart that is now forming a trend change, and that provides a high probability profit setup. The chart below was one of a few provided with commentary to subscribers in our February ETF Profit Strategy Newsletter published 1/21 that identified the Yen setup and signals to watch that would confirm an eventual trend change.

The technicals have now confirmed that trade setup in the Yen and we expect a 9% move in the currency.  The chart above was first published when FXY was trading at $109, but being patient and allowing for our technical analysis to first confirm a trend change we are able to get a much better entry price and higher probability trade (FXY is now trading around $102). There are compelling reasons to expect Japanese stocks (NYSEARCA:EWJ) to also eventually trigger a trend change.  The ProShares UltraShort Japan (NYSEARCA:EWV) could be purchased or the ProShares Ultra Japan (NYSEARCA:EZJ) could be shorted to take advantage of that trade, once it is triggered.  When the technicals align and sentiment is extreme, the risk of loss is lower, and that excites us.  FXY (NYSEARCA:FXY) could now carry as far as $114 and the Ultra Yen (NYSEARCA:YCL) to $29 in this bounce where Fibonacci and other resistance likely would come into play.  The technical and sentiment pieces for the Yen are now in place.   We just wait patiently for a similar entry signal on Japanese shares.

The ETF Profit Strategy Newsletter monitors global events and formulates high probability trades based on fundamental, technical, and sentiment research.