What’s Next For Stalling Japan ETFs

Despite the fantastic gains early on, both funds have been unable to break above their prior highs and consistently been bumping up against overhead resistance.  This may be due to an inverse pattern in the CurrencyShares Japanese Yen (NYSEARCA:FXY).

Both EWJ and DXJ were spurred to new heights as FXY fell precipitously early on.  However, that growth was curtailed when the Yen started to level out.  Global investors are obviously watching the manipulations in the currency markets closely as a signal for strength in Japanese stocks.  There is a strong inverse correlation between the two.

It’s my belief that a breakdown in FXY below its current levels would precipitate a breakout in EWJ and DXJ to new highs.  Consequently, a move for FXY back above its 200-day moving average at $100 would be a negative sign for Japanese stocks and likely send investors fleeing for the safety of cash.

Based on that assessment, if you currently have exposure to this country I would continue to hold your positions in the expectation of higher prices.  I would closely monitor the Yen as an early warning signal of any potential problems that would precipitate a sell off.  In addition, having a defined exit strategy to lock in gains in case the tide turns is always a prudent investment discipline.

New investors that are looking to trade the breakout will have a more difficult decision because of the overhead resistance.  My advice is to start small and look to average into new positions on a spike in volume and momentum above the prior high.  Another strategy might be to wait for a pullback to initiate a new position at a more attractive cost basis by using the current volatility to your advantage.

No matter what your strategy, remember that international markets can often time trade much differently than domestic stocks.  That can be a blessing or a curse depending on the environment and your positioning.  That is why using an ETF to diversify your risk and remain liquid is one of the best ways to access these markets.

This article is brought to you courtesy of David Fabian from FMD Capital Management.

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