Tech Musings

Harold Wilson said a week is a long time in politics, something similar would be very apt for stock markets as well. While I am writing this post S&P500 is trading at 1345 almost 100 points lower than it was on 21^st October 2012. As readers may remember I alerted them towards the break down in S&P on 21^st October S&P500 which seemed invincible few weeks back has corrected almost 100 points without any sign of retracement. The current state of market is very fragile due to steroids (monetary easing) given by central bank and this fragility will persist. The problem with this state of market is that it doesn’t give exit option to trapped traders and investors.

I am seriously expecting and hoping (although hope is one of the worst enemy of a trader) that S&P500 won’t close the current month at these levels. As per my chart reading if S&P500 fails to pull back and close above 1360 markets may be in for a deeper correction.

But all is not gloom and doom in this scenario. One particular market which I like for long term investment from here is Japanese markets.  On 4^th may 2012 I wrote “The next chart is of Nikkei 225. Surprisingly Nikkei is one index which is looking good. It had broken out of 5 years of downtrend. The target for Nikkei is around 11500 and 12500.”

If we look at the first chart we can see that Nikkei had broken out of 5 years of downtrend and consolidated above the resistance line since last seven months.  Even a 38% retracement from here will take Nikkei to 11300 levels and 50% retracement will take it to 12500 levels.   

Nikkei - Weekly chart

The second chart is a quarterly chart of Nikkei, We can see that Nikkei is forming a Pennant on charts and I expect that it will break out on the upside.

Nikkei - Quarterly chart

The third is a yearly chart of Nikkei. Readers may notice that since last 11 years Nikkei has not given a yearly closing below 8000 levels. The current year is forming a doji which should be followed up by a morning star next year.  Also readers will notice that in 2010 -2011 Nikkei formed an evening star on yearly chart but it instead of correcting severely the bearish pattern failed. As we all know that any failure of bearish pattern is considered to be a sign of bullishness in technical analysis. 

Nikkei Yearly chart

When I ponder on the reasons why Nikkei may do well I think depreciating yen may be one of them. Readers may remember that I have been bearish on Yen since June 2011 and I reiterated my call on 26^th October.  Secondly if we all know that Japanese stock market is in bear grip since last 22 years. Such long bear markets result into purging of all wasteful expenses and make organization super efficient.  This process of creative destruction is one of the most beautiful and essential part of a free capitalistic society. Moreover Japanese markets are trading at very low valuation. I think in next three years may see Japanese markets giving substantial returns. 

Summary

1. S&P500 should have a pullback rally and a larger fall may come if S&P500 fails to stay above 1350 on monthly closing basis.
2. Nikkei is looking good although there may be few months before it breaks out. I feel it may go up by 50% in next two to three years.