Japan ETF: Nikkei Crash Similar To May 6, 2010 S&P 500 Crash (EWJ)

Thomas Carreno:  There was a huge huge trade that I missed today unfortunately and also was not quick enough to write about it.  The trade was going long the iShares MSCI Japan Index ETF (NYSE:EWJ) right near the open today.

The EWJ opened down in crash fashion because of the overnight drop in Nikkei Futures.  The opening in the EWJ ETF was so extreme that it had the daily RSI at a record record low point perhaps near a value of 10 RSI, not only that but the EWJ also opened right at a strong level of support from the June July 2010 time frame.  This morning was a huge opportunity to go either long the EWJ or long some March or April call options on the EWJ for potential 100% to 500% profits by the end of day.

Certainly based on the news it would have appeared that the EWJ was an extremely high risk trade with the nuclear and earthquake fears, but in actuality this is one of the lowest risk trades one can take in my opinion.

You had washout blow out panic volume, massive oversold RSI and opening right near an important support range.

I think it is quite fair to describe the recent 5 day move in the Japanese Nikkei index a crash in terms of the speed and magnitude of the decline.

So the lowest risk trade was near the open today, but there may still be a chance to trade the EWJ as it is now still in a very high volatility cycle and we should see huge swings in both directions.  But I would say that now the trade becomes much more dangerous compared to this morning’s trade.

The crashes that I have experience and watched over the years seem to generally have the same pattern.  First you get the initial massive panic day on massive capitulation volume.  Then you get a strong automatic rally up, and then this rally stalls out.  After the automatic rally stalls out, there is typically a RETEST of the CRASH LOW on lower volume to mark the final low.

What is interesting is that the current decline in the EWJ seems to map the flash crash low of May 6, 2010 in the sp500.

We should now see perhaps a massive upwards rally in the EWJ ( the 60 minute chart is showing a potential head and shoulders bottoming pattern with a projection of about 10.62 in the days ahead) that eventually loses energy and then starts a follow on waterfall decline back close the panic low of today which was 9.24.

The Fibonacci 61.8% retracement of the decline comes in at 10.70, so somewhat near the 10.62 inverse head and shoulders projection.

The sp500 on its automatic rally managed to make it to the 61.8% retracement as well.  Whether the EWJ can make it that far is unknown but it is a potential target area.  Also to consider is the down trend line that started the decline.  The sp500 almost made it all the way back up to this line.

ewjsp50020110315

One thing I know for sure is that the low today in the EWJ will eventually be retested.  It was on absolute blow out all time record high panic volume.  It WILL eventually be retested.

So the very aggressive trading situation is to go long the EWJ on a move above 10.12 then let it try to find upside near the 61.8 Fibonacci level or near the down trend line and then go short for the very likely eventual retest of the blow out volume low similar to what occurred in the sp500.

But again, the trade was at the open today.  Now it gets much more complicated with more difficult violent up and down swings in this range…

I am going to keep track of this EWJ the next 2 weeks and see what can be learned here…  More post updates on EWJ as developments warrant…

Written By Thomas Carreno From Best Online Trades 

I started Best Online Trades because I really enjoy trading and I also enjoy writing about trading.  Writing about trading or trading strategies helps transfer thoughts that would otherwise stay in ‘theory’ and helps move them to more concrete form for me. And hopefully along the way you will pick up something useful as well.  BestOnlineTrades covers many different aspects of trading, from commodities to stocks, from indices to ETF’s.


Leave a Reply

Your email address will not be published. Required fields are marked *