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The Most Important Chart in the World Today

The Most Important Chart in the World Today

"Alexander was unique, the closest thing I met to a master of the markets, which, I’m now convinced, no man really is. He was twenty seven.....(and) had grown up trading a portfolio of securities. He recalls making a killing in the stock market while in the seventh grade. At the age of nineteen he lost ninety-seven thousand dollars on U.S. treasury bill futures. He was not, in other words, a normal child. Once he learned to ride his gains and cut his losses, he never looked back. What he lost in t-bills, the made back several times in gold futures.

Alexander had a knack for interpreting events around him. The most impressive aspect of this was its speed. When news broke, he seemed to have already planned his response. He trusted his nose completely. If he had a flaw, it was that he lacked the ability to question his own immediate reactions. He saw the markets as a tightly woven web."

"Liars Poker" - Michael Lewis

The above passage prompted a great leap forward in my understanding of markets when I first read it a quarter of a century ago (the emphases are mine). In particular, the interconnected nature of markets helped make sense of market action and reaction.

This is why I often look to the price action in other markets to inform a view on another trade. As an example, watching copper and oil gives me a sense of current industrial sentiment - which is an important component of the performance of industrial shares.

Right now, one chart could inform every other market.

The Yen is currently considered a "safe haven". (I have my doubts about this concept, but we'll talk about that later). USD/JPY  is sliding (Yen rising) as Japanese investors recall their global investments, and some global investors send their funds to the perceived safe haven. This USD weakness (Yen strength) is also reflecting the impact lower global growth could have on the Fed's tightening timetable.

As shares, oil, gold and bond markets are whipped by daily shifts in sentiment, USD/JPY has provided a reasonable guide to the session's  sentiment. When USD/JPY is falling, fear is rising. And the chart is about to complete a significant reversal pattern:20160225 usdjpyThe light blue W's are generated by the CMC platform's pattern recognition scanner. Note how the first bottom of the W falls outside the Bollinger Bands, and the second bottom is within. Yesterday was a hammer candle - that is, the market sold off, then rejected the lower prices as the buyers took control and USD/JPY finished near the top of the range. All that is required to complete the W reversal formation is a blue candle - the bigger the better.

Sure, there's a potential trade right there (buy USD/JPY at 112.45, stop loss at 110.90, targets somewhere between 116 and 121) but it's the implications for other markets that are capturing attention.

If USD/JPY is about to rise it's a sign that fear is falling and confidence is returning. This could see sustained selling in gold and bonds, and buying in share markets around the world. Oil prices are likely to at least stabilise. All of which could lead to a much more positive investment environment over the coming weeks and months.

That's what makes USD/JPY the most important chart in the world today.

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