Yen strength disrupts Dow uptrend

Price at time of writing – 15,081.

My last update suggested recent hesitation in the Dow's progress towards its next resistance, at my target band defined as 16,023-16,186, appeared over.

This call proved premature however, with the past fortnight's 500-point fall confirming this as a false start. Despite this setback, the big picture remains completely intact, with support bands far from challenged.

Lately, the first market I look at each morning is the USD/JPY currency cross. Since Prime Minister Shinzo Abe formed his government in December 2012, this pair has become an extremely accurate indicator in determining the direction of global equities, and particularly US equities. Put simply, a strong yen signals weak equities, while a weaker yen equates to equity strength. It is quite easy to understand the beneficial impact of a weak yen on the Japanese domestic stock market, but much harder to see why this correlation extends to markets as diverse as the US and Australian stock markets. The peak on the Dow prior to this summer's market correction occurred on 22 May, and on the same day USD/JPY peaked at 103.73. The subsequent falls were also very similar in terms of scale and duration. Recently, the tipping point for downside momentum appears to be the cross-rate of 98, and last Thursday's 225-point fall on the Dow coincided with the rate falling below this marker. Needless to say, the current stalled rally on the Dow has mirrored recent strength in the yen. 

Despite the headwinds of a stronger yen, the Dow's uptrend remains intact, and will remain so while the index trades above the crucial support band defined as 14,394-14,556. We currently have a comfortable margin before this band is seriously threatened. 

Recommendation: stay long. Take profit and sell short at 16,175. Stop-losses can be activated on weakness below 14,350.

Dow Jones Industrials chart

 

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