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Japan stirs, wheat and cotton make extensions. Commodity comment

The Japanese stock market has been range-bound for most of this year, trapped between the pessimism of outlook that has become embedded there and the government's frantic actions to get things moving again. In some ways this has become a sleeping giant as Japan is still the third largest economy in the world despite enormous indebtedness. Now, the Dow version of the Japanese national index has pushed up from compressions, indicating that it will make further gains. We already bought it:

Jap Dow comp brk up

This is not the first compression in the trading range and not the first break upward either, but now there is more to this argument. In recent times there has been a close correlation between the turning points in the $/Yen exchange rate and the Japanese stock market. Here is a comparison:

$ yen vs Jap Dow

The little turn upward that we have just seen in both of these markets shows that the connection continues and we have reason to think that the $/Yen will continue to move higher. The $ index and the $/Yen have moved closely together in recent months which is not surprising but these two rates are not usually quite so closely connected as they have been. Now, the $ index has just moved up from a daily-scale compression, meaning that it will probably move even higher. This will improve the chances that the $/Yen will also move higher alongside it which should benefit the Japanese stock market too:

$ Yen and $ index comp

Elsewhere, wheat and the other grains have been falling sharply for just over a week in the face of expected high yields in the mid-West as we approach harvest. Now wheat and cotton have made bottom extensions, so this decline is at or near an end, at least in the short-term, meaning (for us) a few weeks:

Wheat & cott bott exts

The general commodity picture has been one of a rally through the year that peaked in early June and weakness since then. We suspect that this weakness will soon end (or pause) and these wheat and cotton extensions are some evidence of this, as is the weekly bottom extension in Corn reported in the August 15th edition.

Commodity ext update

We have short positions in copper, sugar and soya oil that we will look to cover over the next few days. We have already tried buying Corn but abandoned the trade yesterday. We will now try to buy it or some of the other related markets again when we have created some space in the portfolio.

All signals courtesy of our friends at Parallax Financial Research www.pfr.com