Did Japanese Stocks Just Signal A Big Negative Event For Global Stocks?

November 9, 2017, 4:00pm EST

Japanese stocks have been a huge mover over the past quarter, as we discussed earlier this week. That move extended to a new 25-year high overnight. And then we got this …


As you can see on the far right of this daily chart, the Nikkei had a very slippery reversal to post an 1,110 point range for the day (closing near the lows).

This was the biggest range in the Nikkei since exactly one year ago today. That was the night of the U.S. elections (the day, in Japan).

Now, despite the huge range of the day, today’s losses in Japanese stocks were only 1.7% (open to close). Let’s take a look back over the past two years, though, to other times we’ve had a 1,000+ point range and on a down day.

There was the Brexit surprise in June 2016 (-9%). And then when the Bank of Japan shocked world markets in a scheduled meeting by NOT upping its QE program in April 2016 (-7%). Prior to that, was the middle of January of 2016 when oil prices were crashing (-4% and -4% two out of three trading days). Then there was December 18, 2015, the day after the Fed made its first post-crisis Fed hike (-2%). And then we had a day in August 2015 (-6%) and into the first day of September (-5%). These were driven by a surprise devaluation of the Chinese yuan, which set off a global stock market slide on fears of a weaker China, than most thought.

Now, we’ve just looked at all of the days for Japanese stocks where the range has been greater than 1,000 points and stocks have finished down. As you might deduce, these days all share a common thread. There was a big event related to these moves. So what was the event that caused this last night?

Nothing, of note. That’s concerning. Is there something bigger going on, that has yet to present itself. Is it perhaps the news out of Saudi Arabia that is about to lead to a global event?

Keeping the focus on what happened in Japan: First, for market technicians, this is a perfect “outside day” reversal signal. This is when a new high is set in an uptrend, a buying climax, and the buying exhausts and weak speculative longs are quickly shaken out of positions forcing prices to lower lows than the prior day (closing near the lows). The wider the range, and the more significant the volume, the higher the likelihood that a trend reversal is underway.

With that in mind, to the far right, you can see the spike in volume for the day.


As far as the range is concerned, we discussed the significance of a 1,000 point range historically.

So technically, there’s a fair reason to bet on a reversal here for Japanese stocks here. That leaked over into European stocks today. German stocks were down 1.4%. And it looked like U.S. stocks might have the same fate today, but the “buy the dip” appetite was clearly strong. If history is any indication, we might have better levels to buy the dip. And the dips in recent history have been lucrative: sharp but quickly recovered.

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