Japan Breaks To New Relative Lows

JC Parets
February 14, 2019

From the desk of Tom Bruni @BruniCharting

Tuesday we posted a mystery chart and asked you all to let us know what you would do. Buy, sell, or do nothing?

As we expected there weren't any bearish responses, instead most of you were buyers at current levels or on a pullback. We think the evidence is clearly pointing in that direction too, which is why we put the question out there in the first place. What, if anything could we be missing?

Now that we're all on the same side of the boat, let's get into the chart and why we feel it's relevant.

The chart we originally shared was an inverted daily line chart of the Japan ETF (EWJ) relative to the S&P 500 (SPY).

The corrected chart shows prices resolving a multi-year range to the downside in mid-2018, quickly meeting our first downside objective, and then consolidating in a classical "bear flag" pattern. Its downward-sloping 200-day has finally caught down and prices are now resuming lower with momentum quickly getting oversold again.

Click on chart to enlarge view.

This looks like a very clear chart with all of the evidence suggesting lower prices are ahead. From a risk management perspective we can use our initial target of the 161.8% extension as our new risk management level, targeting the 261.8% extension over the intermediate/long-term.

Japan isn't the only Developed Market that's at or near new lows relative to the S&P 500. While some outliers have been able to buck that trend, when looking at the group as a whole we see that these multi-year trends of under-performance are very strong and there continues to be little evidence of them reversing anytime soon.

Calling tops and bottoms are not our thing, so instead we'll use these new breakdowns to define our risk on the short side if executing these pair trades, or we'll continue to use it as information to identify fund flows.

Money flows to where it's treated best...and most Developed Markets Ex-US and Canada have not been kind to it for a very long time.

We've done a deep dive into this area for Premium Members outlining some of the best pair trade opportunities available right now.

For access to the full deep dive and all of our premium research, start your 30-day risk-free trial or sign up for our "Free Chart of the Week" to receive more free content like this.

Thanks for reading and let us know if you have any questions!

Allstarcharts Team

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