Zak Mir’s weekend missive – The Lazarus Like Nikkei Index & departed oxford dons!

Having failed to get into Oxford in the late 1980’s after arguing with an Oxford economic don regarding the true influence of the Japanese economy on the West, I’m guessing that over a quarter of a century later the academic is now presumably pushing up the daisies, and revenge is very, very belatedly all mine as the Nikkei looks set to stage a Lazarus like recovery..!

We can see on the weekly chart that we have what would appear to be an extended W shaped recovery pattern that has been forming since the sharp declines from 2008. On this basis there is considerable scope for optimism given that the beginning of March has witnessed a clean break of the former 2010 resistance at 11,408. By clean, I am pointing out the way that since 11,408 was broken, the Nikkei has had so much positive momentum there has not even been the need to test this zone as new support. The view is therefore that while there is no weekly close back below the old 3 year peak we should be treated to a continuing journey towards the favoured destination for this market during 2013 – the 2008 intraday high of 14,601. This may sound a tad optimistic given that the RSI here is now a sizzlingly overbought 85 but, once this unwinds – ideally while still above the 2010 peak, we are looking at a very encouraging picture from a weekly and monthly basis. The timeframe on the 14,601 is the next 3-6 months.

I have been thinking long and hard about currency wars in recent weeks given all the media coverage of the concept of ‘competitive devaluation’. My view is that whoever has the honour of being the reserve currency – in this case the US, has a major advantage in that the Americans can print themselves out of trouble – precisely what they are doing now – and so pressure their own currency to the downside. However, for our German friends, swapping the Deutsche Marks for Euros gave them not only a captive doorstep market (much of which is now too poor to leave the EU), but has also delivered them a competitive currency edge as they are actually gaining at the expense of their Southern European neighbours and as witnessed in the export figures.  This is a situation that will ultimately bite the Germans in the posterior I feel however as political ruminations as we are already seeing in Italy and Spain eventually push for the exit of these countries – contrary to Super Mario Draghi’s desires…

Speaking of the U.S. and the reserve currency, my opinion is that at least part of the credit crunch collapse was due to the Euro threatening to end the U.S. Dollar’s reign as the worlds primary reserve currency and so raising the once unthinkable risk that the U.S. could go bust. The answer was to destroy the Eurozone by pulling its credit. The U.S. credit ratings agencies have helped wonderfully in this respect with their junk labelling of various Euro nations – handily downgrading Italy today. This may only be a conspiracy theory but, even if the events of 2008 were coincidental with this, it was all very handy.

Getting back to our German friends and the Dax, it has to be said that hitting 8,000 as we did earlier today seems to be, in the first instance, a great big round number to go short at – as a day trade if nothing else. However, as can be seen from the overall charting set up on the daily timeframe, the German index is certainly not to be messed with by the bears. This point is backed up by  the presence of a rising trend channel from June last year with the floor of the channel currently running level with the 50 day moving average at 7,722. The problem with those looking for a retracement by this market may be disappointed given the way that the RSI at 63 is a relatively modest number. The favoured zone for any pullback would be no lower than a combination of the January resistance / early March gap floor towards 7,883. At this stage, only back below this zone would delay the prospect of a top of 2012 rising trend channel target as high as 8,500 and likely on a 1-2 month timeframe.  Indeed, it may be worth noting that with the FTSE 100 also relatively modestly rated in RSI terms with a 62 reading, it is still the case that the European indices are still playing catch up on the  moves seen across the Atlantic.