Update on Nikkei & Yen: Dec 26, 2013

In our May 29 update on the Nikkei [see: HERE], we noted the index’s reversal at the .786 and theorized about a drop to 13,112 or even 12,343 as a result.  The actual decline clocked in just a tad lower at 12,310.

Now, the Nikkei is coming up on a Bat Pattern completion at 17,068. Given the steepness of the rising third wave, even a mild .382 retracement would knock the index back by 20% or so (13,500ish.)

A close-up shows the overlapping Butterfly Pattern also completing at about 17,000.

One would expect such a decline to correspond with a reversal or at least a slowing of the bloodletting occurring in the yen.

So, it’s interesting to me that the USDJPY is approaching the pivotal .618 Fib retracement at 105.57 and the trend line that has smacked it down by an average of 33% the last three times.

There have been times when the pair’s weakness (yen strength) moved counter to US equities.  But, since 2012, it’s been a match made in heaven (or at least the Eccles Building.)  But, contrary to Bernanke’s and Abe’s assertions, what goes up…

In case you’re wondering, the previous reversals at the trend line corresponded with declines in SPX of 19%, 31% and…ouch… 57% (the thin purple line below.)

BTW, that .618 retracement in the USDJPY is of the drop since the 2007 highs.  SPX, of course, recently completed a 1.272 extension of its drop from its 2007 highs.  The fact that they’re occurring at the same time raises the stakes for stocks.

If USDJPY reverses as expected, look for it to retreat to at least the channel bottom at 99.84 and drag SPX back below its 1.272.  Otherwise, we could be off to the races.

Stay tuned.

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