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May 06, 2007

Don't Say You Weren't Warned
by Gary Tanashian

Since its inception in 2004, Biiwii.com has sought to provide balanced analysis during a time of unbridled bullishness in most global markets (two notable exceptions being the US Dollar and the Japanese Yen). Along with this bullishness comes ever increasing risk however and as any good trader knows, managing risk vs. potential reward is of utmost importance. If you have followed the site from the beginning, you have noted a distain for perma-bearishness along with a sort of resignation that a liquidity fueled global casino atmosphere has replaced any semblance of organic economic and market fundamentals.

I have personally done well casting my trades bullishly over the last four years and the few bearish bets I have placed have been met with disappointing results on balance. The first article I ever wrote, FrankenMarket Lives ended with this...

"As entitled modern Americans, I can envision the majority seeing this as bullish, and Alan Greenspan gaining even more accolades as the celebrated maestro. Frankenmarket will probably get an extra bounce in its step. A warning before you go full-bore bullish longer term though; for a reality check on what hyperinflation means, do a little research on what Germany experienced in the 1920's. By contrast, a garden variety Japan style deflation would have seemed very tame. But it is too late for that now."

Well, the mechanics of the inflationary liquidity fest proved different than I thought at the time with the Yen Carry Trade (YCT) taking center stage over any outwardly obvious operations by the US Fed. But the result has been the same; ongoing expansion of munny (def- a: funny munny, b: FrankenMunny) with various global origins with no source more powerful nor influential than the YCT. This is munny created through key strokes and leverage. It is munny that thinks it is real or at the least wants to transform itself into something real. Hence its desperation to convert itself into the hottest of plays like the industrial commodities in service to the China growth story or the miraculous US stock market that is trying to signal that all's well on the deck of the good ship America. Much of this munny is even smart enough to try to hide in the precious metals.

But in an age where debt and leverage giveth, what do you suppose will happen when it taketh away? The Yen and the USD appear to be at important crossroads and they hold the keys to near term market events. Being a natural bottom feeder in my trading practices I would be buying Yen and USD here, which means I would be selling stocks, commodities and be guarded on the precious metals. In a future article I will explain why I do not plan to be without at least a core of gold stocks and why I will plan to add to existing positions if they are wood shedded along with most other assets. I also want to keep a close eye on the US Dollar. But for today, I would like to present three charts of the Yen, which I consider the most important potential trigger to what may be radical changes in the investment landscape to come. Below are daily, weekly and monthly charts of the Yen:

Yen daily sports a set up I just love to buy; a falling wedge down to support. The noted area is not only short term support, but as a look at the monthly chart to follow shows, it is actually very important long term support as well.

Yen weekly offers a view of strong bullish divergence in momentum indicators even as the whole world seemingly either scoffs at the possibility of a strong Yen rise or chooses to ignore its implications. Also, the Yen has clung to the vestiges of a modest up trend and could be in the process of forming an inverted head & shoulders pattern, which would be bullish.

Not concerned yet? Just a bunch of TA mumbo jumbo on a weekly chart? Well, here is a simple monthly chart of the Yen showing a symmetrical triangle pattern in the making since 1995. The Yen is at major support. The whole world is on the other side of the boat. You do the math and please do not say you were not warned. Being long over-pumped equity markets, China stories and commodity assets would not be the place to be if the Yen makes a major move and all that funny munny stops dead in its tracks.

Over at Trending123.com, John Lansing notes that "cash is a position" and has backed this up by getting his subscribers out of the markets in the last week or so. I have known about this cat for years and in fact became interested in technical analysis in no small part due to his influence and talent with charts. "Cash is a position" and risk vs. potential reward must always be a primary consideration. Right now I would rather be long caution than long CNBC.

For those who may agree with this analysis and are interested in the Yen and USD for diversification and/or risk management purposes, Rydex offers its CurrencyShares ETF's including Japanese Yen Trust (FXY). We currently have no position but are strongly considering one in this vehicle as well as a strengthening dollar fund such as the Rydex RYSBX to serve as hedges against current gold stock holdings and the very few other stock market longs currently held in the semiconductor and airline sectors. But again, keep in mind Mr. Lansing's position: Cash is a position also... and it's currently paying 5%.

Gary Tanashian
http://www.biiwii.com/

Disclaimer: biiwii.com does not recommend that any trading or investment positions be taken based on views expressed on this site. If you speculate or invest it is suggested that you consult a financial advisor qualified in your area of interest.

Copyright © 2005-2009 Gary Tanashian

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