A Backtest, or More?

The Nikkei 225 offers great perspective on today’s selloff. One of the most heavily manipulated indices on the planet (the BoJ buys stocks outright), it was knee deep in a steeply falling channel from its January highs until Apr 30, when it tagged the top of the channel and the .618 Fib level. It was a high probability reversal point.As usually happens, though, the yen carry trade kicked into high gear. The USDJPY spiked through its SMA200, carrying NKD up and out of the falling channel. A backtest two weeks later turned into a close call, with NKD closing back inside the channel for a few days — not exactly a clean backtest.

But, after a strong USDJPY bounce, NKD was on its way again. The critical day was Jun 12, when it failed to make a new high. This failure spoke volumes, as it was in keeping with our expectation that, just like many major indices, it was simply marking time until its SMA200 emerged from the very bearish falling channel established earlier in the year.

It’s a hallmark of the current bull market — slice through resistance when possible, then defend those levels like there’s no tomorrow. With ES currently off 32 points, SPX and DJIA are in position to attempt the same maneuver – a day earlier than we had expected.