The Japan’s Nikkei is Starting to Crack

Welcome back to the show. In today’s installment of The Daily Reckoning, we look at whether markets are poised on the verge of a large crash. A spirited debate in our Melbourne headquarters last week clarified the positions of some of our analysts. But what took everyone’s breath away was the price action in Japan.

You know a system is unstable when it becomes increasingly volatile. In that sense, stock indices are like drunken supporters at the footy. One second they’re out of their seats whooping with beer spilling joy. A few moments later, they’re cursing a blue streak that would strip the chrome off a bumper.

Take the chart below. Japan’s Nikkei fell 12.2% in intra-day trading last week, from a Thursday high of 15927 to a Friday low of 13981. A 2000 point swing is remarkable. On Friday alone the intra-day swing was over 1000 points. Is that the kind of move that suggests that the market has cracked and Japan’s QE rally is over? Has the monetary doping cycle ended in a bust?

Source: StockCharts

Well, your editor will admit to being remarkably complacent about Japan’s mini-crash. The Nikkei is still up over 60% in the last twelve months. Most of that move has come since November. Last week’s move — coming after bearish data on Chinese manufacturing — could simply have been traders taking profits, especially traders who were leveraging the move in Japanese stocks with cheap Yen.

This was Murray’s view, that a rising Yen would force speculators to sell positions and cause an even bigger move. Murray reckons the technical set-up is perfect for a correspondingly big move down in Aussie stocks, as well as the S&P, the FTSE, and the German Dax. He’s advised a short position on the index, with specific target levels.

But surprisingly, the Slipstream Trader was the only one sounding the alarm. He’s out with the flu this morning. He’d be pleased, though, that the Nikkei has opened down another 3.5%. It could be a grim day. (US markets are closed Monday for Memorial Day).

Dan Denning
for Markets and Money

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