Nikkei Breakout

What culture is more open to automation?

S&P 500 vs Shanghai Composite and DAX

I like to look at time and price separately. I'm rather comfortable saying the United States is topping and foreign markets are bottoming (with caveats like Europe's ongoing disaster). The problem is that these historic peaks have often been made with spike lows because of currency effects. A blowout move in the DXY amid a global bear market in stocks could produce extreme ratios. I used Templeton Emerging Markets (EMF) as an EM proxy. A 50-percent relative move would take it back to the 2000s high, but that requires a roughly 40-percent drop from here assuming the S&P 500 Index bottoms out around 3400. Not an impossible move if it was currencies helping drive stocks to a low this autumn, but this should be a culmination move. For example, I have short positions on EMs for October, but the next trade after that could be more of a long-term buy.

Weather Forecast: It's Raining Yen, Hallelujah

The catalyst for the bull rally was lower oil prices and higher bonds though, and while oil hasn't given the all-clear yet (below $90 completing the massive top), bonds have with ZB breaking my resistance line today.

The 10-year bond hasn't completed its base. The target on ZN from an inverted H&S, should it complete, is near the horizonal that marked the top.

There is a gap on TLT, about 1.66 percent away. The target off the pattern is $130 and if we zoom out on the second chart, you can see that blue line is "the same" line as the one on ZN, while the green trendline in the neighborhood is long-term support. That is three different signals pointing to this area. I think the market should achieve that target by September. I'm holding August calls expecting a front-loaded pop.

If I can pick one bond chart to showcase everything important here, it's the spread between the 10-year JGBs and USTs. It's the same inverted H&S pattern.

Let's see how that chart stacks up again the yen:

Gaps like these don't have to close, but if it does, it points to a 6 percent minimum rally in the yen. That translates into a roughly 13 percent gain in the ProShares Ultra Yen (YCL), a 2x levered ETF. I grabbed 100 calls August $35 at 20 cents when I posted earlier this week on the yen. I may grab some puts on YCS, the 2x short yen fund. Futures options are more liquid if you have the option. As always, I recommend either buying the fund outright, going with more time or in the money. Another option, if you're bullish, is to go long an unhedged Japan ETF such as EWJ. They will rally with U.S. markets, but get a boost from the currency. I bought calls on EWI and EWG for a similar reason.