Yen weakness trade ideas

19 November

During last week, I showed the potential for a Bollinger Band contraction on USDJPY to set up a breakout in favour of the USD. Last week, the Yen was weak against all currencies, here is the updated USDJPY chart.

The upper Bollinger Band was broken but the bands still moved closer together, so a breakout signal was not given, according to my breakout criteria.

Also, the bands have not moved quite as close (yet) as in February. If they don’t get to the tightest in three years, that criterion will not be met.

I want trades that meet my criteria, to take advantage of any rally in USDJPY. This is where pairs trades can come into their own. Some of my pairs may seem obscure and the bid/ offer spread may not be tight on some components. However, they demonstrate what can be done and could be applied as over/ under weight positions by long only fund managers.

A rally in USDJPY will likely lead to Japanese exporters performing better than Japanese domestic orientated stocks. From the available ADRs, one domestic stock that has potential to underperform is Nippon Telegraph and Telephone Corporation (NTT).

Pairs trades against NTT: Bollinger Band breakout set ups

I ran a Metastock scan on 182 ETFs, US sector and market indices and Japanese ADRs for series that, when charted as a pair against NTT, have contracted Bollinger Bands. The results showed 67 pairs to have (now or in the last five weeks), Bollinger Bands at their tightest for three years.

This is an example of clustering of results. It tells us something is worth further investigation. These series are examined to see whether they fit the criteria outlined.

Orix Corporation (IX) v NTT

The ratio has consolidated since March. It recently broke above the bands and pulled back in. A sustained break higher would be to new four year highs.
 
Kubota (KUB) v NTT

This has also consolidated since February and now breaks above the Bollinger bands. The original break above the band was not accompanied by increasing band width, so this is the first signal.

Mizuho Financial (MFG) v NTT

This had been in a downtrend for years. It has consolidated since March, contracting the bands. Watch for a break above the upper band and the 2012 resistance level. Preferably, the moving average should be rising and this isn’t currently the case.

SPDR Financial (XLF) v NTT

This has consolidated since March and awaits a breakout. The 40 week moving averages on these charts are rising. One of the criteria I added was to see a clearly trending moving average and to take breakouts in the direction of the average.

SPDR Retail (XRT) v NTT

This has consolidated since April and awaits a breakout.

Conclusion

I’m going to stick with the Japan stock trades. A weakening Yen may help the Japanese market outperform and there could be a ‘rising tide lifts all boats’ effect, even on some stocks like NTT that merit it less.

A position in KUB v NTT is opened at 2.27571. The stop loss is at 1.89, shown by the green line. That is 17% lower but in practice, if the breakout doesn’t hold, the position would be cut before reaching that level.

The IX v NTT trade needs a bit more proof that the break higher of early November will be maintained.