2 Things You Should Never Forget As a Trader! Japanese Yen and S&P 500 in Focus

Posted Thursday, February 9, 2017 by
Eric Furstenberg • 4 min read

Risk sentiment. What an important factor in the financial world! The powers of fear and greed clash in the markets everyday. When big moves happen, and money flies all over the place, some instruments can give us clues to whether market participants are fearful or greedy.

You see, when investors are hungry for returns, they don’t like to fool around with assets which don’t offer good yields. Like the Japanese Yen and the Swiss Franc. These currencies don’t yield high interest rates and are considered to be safe haven assets. The same counts for gold, which is a popular instrument in times of political and economic uncertainty. Let’s not forget about the US Dollar, which is also considered by many to be a safe haven, although it normally doesn’t react to risk aversion with the same intensity as the Japanese Yen, for example.  

So what do investors buy when they’re reaching for yield? Well, there are many different assets which offer better returns than, for example, gold or the Japanese Yen. Investors often buy stocks when they’re looking for higher returns on their investment. When they move money into stocks, they will often sell lower-yielding, safer assets like the Japanese Yen in order to free the necessary funds with which they can buy these stocks. Other higher yielding assets include currency pairs with high interest rates. By buying these against lower yielding currencies like for example the Japanese Yen, investors earn interest for every day they hold on to the position. This is called a carry trade. That brings us to our first instrument and lesson for today. Let’s look at the USD/JPY:


USD/JPY – Ready to Move Higher Again?

2 Things You Should Never Forget 1USD/JPY Daily Chart

The USD/JPY has been trending lower for quite a while now. Today’s selloff in the Japanese Yen is something the bears need to take note of, however. Today’s powerful daily candle is a threat to the bearish structure on this currency pair. Although the pair is still in a downtrend in the short-term, the 200-day moving average suggests that the pair is in an uptrend when we look at the bigger picture.

In a healthy downtrend, you don’t want to see the type of candle we saw today, neither do you want to see such a shallow angle in the trend. Another thing to take note of is whether we’re seeing much more red candles than blue candles. In a strong downtrend, the most candles will be red in color which indicates that strong selling is present and that the bears are firmly in control. At the moment we’re not seeing this quality, and we’re seeing more and more bullish candles. The bears need to be careful here.

The first thing we should not forget as traders is that we can’t afford to get ‘married’ to a certain directional bias in a market. Of course, we need to identify the trend and trade in its direction. But we should be attentive to structural changes in the market and get rid of our bias as soon as there is sufficient proof that a trend is over. Novice traders often hang on to their belief about a financial instrument until they’ve lost much money, instead of adapting to dynamic market conditions like a pro. Am I saying the USD/JPY downtrend is over? Not necessarily; but keep a close eye on the structure of this trend.

Here is a weekly chart, just to give you some more perspective:

2 Things You Should Never Forget 2USD/JPY Weekly Chart

Here we can clearly see that the long-term trend is up, and the price is holding above the 20-EMA and 200-week moving average. The short-term downtrend we’ve experienced in the last few weeks is just a mere correction in the larger bull trend. Let’s see if this pair will hold above its 20-week exponential moving average and make some more progress higher in the weeks to come.


S&P 500 – The Amazing Bull Trend Continues

2 Things You Should Never Forget

S&P 500 Daily Chart

To come back to the whole sentiment subject, I noticed this afternoon, that when the Japanese Yen started selling off aggressively at about 15:00 GMT, the S&P 500 and other equity indices started to move higher quite impulsively. This shows how risk sentiment influenced the money flow today. We also saw a selloff in the Swiss Franc and in gold, which, as I mentioned earlier, are both safe-haven assets. So the safer assets were traded for riskier, higher-yielding assets.

About the S&P 500 – the strength and the persistence of this trend are just phenomenal. The second thing we should never forget is to trade with the trend. The trend is your friend. This is the single most important principle in trading financial instruments! You could have bought the S&P 500 at any time in the last couple of decades and you would have been in profit today if you just held on to your position(s). Besides this, the last few weeks have also offered fantastic trading opportunities. I hope you utilized my trading tip on 31 January when I wrote about buying the S&P 500. Here is a link to the article: US Dollar Trades on the Back Foot While Equities are Correcting Lower. This would have made you a handsome profit. I’m still in the long position I mentioned in that article. The bull trend is really healthy, so I’m in no rush to take any of my profits at the moment. My stop loss has been brought to breakeven, of course. I will definitely be on the lookout for more buying opportunities on the S&P in the days to come. 

That brings us to the end of today’s analysis. Remember to adapt to changing market conditions, and to trade in the direction of the prevailing trend. There is a lot of money to be made out there. Let’s make it!

Good luck with your trading guys!

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