Stocks fell off a cliff as investors sprinted to the sidelines; the Dow Jones Industrial, S&P 500, and NASDAQ all declined upwards of 4% in Thursday trading. Nearly every corner of the market fell victim to profit-taking and rampant panic-selling as investors scrambled to close positions, anticipating that the worst has yet to come. After climbing to a record high around $1,684 an ounce in the morning, gold tanked lower all throughout the day, shedding over $30 in a matter of hours. Crude oil spiraled downward as well, with futures prices losing over 6% during the day and closing just above $86 a barrel. The Japanese yen has been on a tear in the currency markets for the past month versus the U.S. dollar as investors have been dumping the greenback and fleeing to safer corners, given the escalating levels of uncertainty surrounding the financial health and economic recovery progress of America. The CurrencyShares Japanese Yen Trust (FXY) is up close to 3% year-to-date, while UUP, which tracks the U.S. Dollar Index, is down just over 6% for the same time period. This trend quickly reversed Thursday morning, however, as the dollar rose as much as 3% versus the yen after the Bank of Japan intervened in the currency market following its decision to keep rates unchanged at 0.1%.
FXY opened lower by over 2% on Thursday morning and the ETF is currently in a “sweet spot” so to speak, since it can easily bounce back from its recent sell-off, or begin a more serious correction and fall further.
It’s hard to ignore FXY’s robust uptrend; take a look at the chart below and notice how the fund has been consistently rising, making higher-highs and lower-lows over the long-run. It appears as though the fund recently peaked at $129.26 a share on 8/1/2011, after which it gapped violently lower, closing below $125 a share on Thursday [see FXY Fundamentals].
From a technical perspective, the yen seems poised to cool-off a bit given the steepness of its most recent surge. This assumption could also be supported with the underlying fundamental reasons for the sell-off in the first place, which is that the Bank of Japan intends to weaken the yen in the currency markets [also see International Bond ETFs: Cruising Through All The Options].
Given the truly wild nature of equity and currency markets lately, it’s nearly impossible to sort through all the drama and distinguish between what fundamentals are really driving the market, and what is simply “noise”. FXY is stuck in no man’s land at the moment, and additional selling pressures will easily push this ETF lower, most likely towards its 200-day moving average (yellow line) near $120 a share. In terms of upside, if FXY is able to definitively establish support above the $125 level, then it may very well resume its ongoing uptrend and attempt to pass the previous high at $129 a share [see FXY Fact Sheet].
Conservative investors should remain on the sidelines and wait until the dust settles, this market can and will turn on a dime. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques.
Disclosure: No positions at time of writing.