The world remains in the grip of this recession which has been in control since 2007. There was much talk about "green shoots" of a burgeoning recovery from the economic downturn, giving hope to investors as the markets seemed to be coming out of it. Most technical analysts agree that simply plotting the 200 day moving average on the Dow industrials chart will give a very honest reading of where the market is headed. And since the Dow index hit the 200 day moving average 3 weeks ago, a renewed down move in line with the overall down trend seems to be back in control, having respected this moving average perfectly. But foreign currency analysis can also be a very good, even more accurate way of predicting the future of the economy and the markets. The US dollar vs. the Japanese yen is a good choice, since this currency pair tracks along with the stock markets rather well, but the tech analysis can be much more succinct. Let's take a look at where we are:
Here is a chart of the weekly dollar/yen (USDJPY) price action. It is important to note that both the Dow index and the USDJPY reached a high in 2007, the USDJPY reached 122.00 in June 2007 while the Dow reached 14000 in October 2007. The fact that the USDJPY hit its high but was not able to follow the Dow on its late summer drive north was a huge signal for the coming crash. This is called divergence. Subsequently the downward action on both the Dow and USDJPY are sharp and in a sustained down trend, however the trend on the USDJPY is much easier to follow. There are three obvious points in the past two years when the Dow and USDJPY showed major divergence: first at the beginning of the downturn in 2007, second is in August 2008 when the USDJPY reaches much higher and the Dow was unable to follow prior to the next large down move. The third divergence is in March 2009 when the Dow happily headed lower to reach its low at 6600 while the USDJPY had already reached a low in early January and already started its retracement upwards. The point is: the USDJPY can be an excellent predictor for near future moves and reversals in the stock market, weeks ahead of time.
So where are we now? Ever since the Dow reached its 200 day moving average and the USDJPY was already heading downward, it is likely that more downside can be expected. The USDJPY may reach a bottom near 91.00, or could even return to the 87.00 region before making a renewed move to the north. The current down trend channel is firmly in control. So if the theory is correct that the USDJPY price action can predict the Dow's next move, we should look for a sustained breakout above this down channel to confirm potentially a new upside move, a break out of the recession, and a break from the pessimism in the world economy. That would mean looking for the USDJPY to reach above 97.00 in order to signal buyers back into the stock market.
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