Now look, Heisenberg is no fan of technical analysis.
Because you know, it’s based on f*cking lines. Which is inherently stupid. It’s like astrology. Or palm reading. Or tarot cards.
Here’s a fun example via SocGen that we lampooned last week:
Formation of a daily Hammer pattern at $50.60 combined with weekly and hourly indicators withstanding multi-month floors points to a near term rebound. Holding $50.60/50.00 Brent should therefore edge higher towards $52.20 and $53.00, the down sloping channel limit (blue dash) and the 23.6% retracement of the correction in force since early January. It will take a break past $53.00 for an extended rebound to be set up, in which case Brent will head towards $54.20 and more importantly towards the multi-month graphical level of $54.74.
See? Silly, right?
Well Mark Cudmore generally agrees, but on Tuesday, the former FX trader is out with a pretty interesting missive on technical signals for USDJPY and because i) the yen is one of the best barometers for global risk sentiment, and ii) we like Cudmore, we present it below for your consideration.
A powerful technical signal is set to trigger selling of USD/JPY later this week and history suggests that it’s worth taking notice.
- While this column normally favors fundamentals over charts, this technical trigger appears set to confirm a macro argument I’ve frequently repeated that the dollar achieved a long-term top earlier this year
- The 50-day moving average (DMA) for USD/JPY is set to cross below the 100-DMA of the currency pair, and while I normally dismiss moving averages as a technical signal, this time is different
- This table shows the returns produced by a trading model that’s long USD/JPY when the 50-DMA is above the 100-DMA, and short when the reverse is true. The transaction rate is based on the closing price of the pair on the day of crossing and over the past seven years it’s returned 51%
- The strategy is easily achievable within a pip or two given you’ll generally know in advance when the two lines will cross
- It would currently have an open and very profitable long USD/JPY position: the pair is up 9.5% from 102.98 since the last cross, although that gain is not included in the total gains I’ve tabulated
- Looking at the past 15 signals, nine would have generated profitable trades while six were loss making, and crucially the biggest decline was just 3.9%
- It’s been a very impressive signal overall. As of Monday’s close, the DMAs were 37 pips apart and closing at a rate of roughly 15 pips per day, so they look set to cross on Thursday
- Of course, past performance is no guarantee of future returns, but given the current market backdrop and its track record to date, this signal is one to be aware of