The big event in the markets and the world has been the unfortunate natural disasters affecting Japan. In this post I’d like to see what we as traders can learn from this event. - The first thought that runs through my mind when a massive event like this occurs -- an unexpected event that shocks an economy -- is the notion of contagion. As Japan is one of the world’s most influential economies whose top trading partners include China, the United States, and the European Union, the earthquake in Japan could be the catalyst to bring about the next deflationary spiral, akin to what we saw in the second half of 2008. This seems a bit more likely when we consider that many central banks have begun to shift toward a policy of tightening -- or are at least discussing doing so, as we recently noted.
- The Bank of Japan has intervened in an attempt to stabilize markets, injecting 18 trillion yen (approximately $220 billion USD) into Japanese financial markets. However, currency traders know that the BOJ has been unsuccessful for the past ten years at battling a rising yen and falling equities markets. Perhaps an outright panic exodus can be averted, though I’m not sure this bear market can be turned into a bull market.
- In terms of technicals, I prefer to focus even more on longer term charts when panic events occur. The daily and weekly Nikkei charts are filled with massive red candles down, as chartists may suspect. This event is massive enough to show up on the monthly chart as well, though in less extreme fashion. See the monthly chart below.
(Click chart to enlarge)
The chart illustrates we are getting closer to a support level around the 9,000 area. The price action there, coupled with the round number element, and that BOJ has expressed a strong and clear interest in propping up the Nikkei, could lead to a bit of a rally, perhaps to 9,700. I do think a rally in the Nikkei to 9,700 or 10,000 will create another opportunity to short sell from those levels as well.
As always, feel free to share your questions and analysis in the comments section below.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
