You are on page 1of 2

Following Japans Lead

in Price Forecasting
Get a handle on general overview charts, and you may
end up illuminating Japanese market mentality
any investors are familiar
with candle charts, the
Japanese twist on the standard bar chart that shows opening,
high, low and closing prices for each
period. By using a candle shape and
shading it when the closing price
is below the opening price, the Japanese added a visual enhancement
that has helped many a trader shine.
The fact is, Japanese traders have
been using charts for hundreds of
years, dating back to the early days
of rice trading. When you add that
tradition to the large amount of
money Japanese institutions control,
its obvious why candle charts might
shed some light on what Japanese
market players think. You can get
part of the way via Bloombergs
General Overview Chart (Ichimoku
Kinkohyo in transliterated Japanese,
also known as Ichimoku Sanjin).
For example, lets check out the
general overview chart for the Nikkei
225 index. To bring it up, type
NKY <Index> GOC <Go>, where, in

addition to a standard candle chart, tricky, figuring out what they tell us
youll see five additional lines that about future price movement is trickidentify trading opportunities. The ier still. Some general rules can
lines are delineated in the key, but help. For instance, the area between
the conversion line and
they require further exthe base line is called
planation. Briefly, the
when the
the resistance zone or
conversion line takes
the midpoint between
price candle cloud. Analysts consider
this the support/resisthe high and low prices
tance area. In other
for the previous nine
lies
words, if the price candays, the base line takes
dle is above the zone,
the midpoint between
above the
it sets a floor, which inthe highs and lows for
dicates strength and
the previous 26 days
baseline,
a good opportunity to
and the lagging span
buy. Conversely, if the
is simply todays closing
the market
candle is below, it may
price charted 26 days
be a signal to sell.
ago. The last two lines
trend
When a rising market
are the leading span 1,
picks up speed and beor the average of the
is bullish
comes overheated, the
base and conversion
base line is likely to replines charted 25 days
resent the support level
into the future, and the
leading span 2, or the average of that would stop the eventual price
the highs and lows for 52 days, plotted decline. When the conversion line
crosses the base line from below,
25 days into the future.
If you think unraveling the lines is it may indicate a good time to buy.
Similarly, when the conversion line
crosses the base line from above, its
a sell signal. (The conversion line
is normally above the base line in a
rising market.) The crossover also
provides a measurement for the
running market strength and the
potential for any further rise.
In general, when the price candle
lies above the base line, the market
trend is bullish. If the candle lies
below the base line, the market trend
is bearish.
Now lets look at the lagging span,
which is supposed to read the flow
of the market by comparing todays
close and the close from 26 days
agosomewhat like the Rate of
Change function, ROC. The span inFigure 1. Type JYS <Crncy> GOC D <Go>. Tab down, change the ending
dicates the markets strength by its
date to 06/13/95 and press <Go>. The first buy signal occurred when leading
position relative to the price of 26
span 1 crossed above leading span 2
days ago. When the lagging span is

CRNCY

bloomberg march 1996 43

above the market level of 26 days ago,


it generally indicates strength and,
so, a good time to be long. When it is
below, it may represent a signal to
sell. When you see a crossover of the
two leading spans, it may indicate a
change in future direction. Normally, leading span 1 is above leading
span 2 in a rising market.
aturally, as with any technical
chart, caveats are in order.
For instance, the formation
works best in certain market situations and requires more thought
than, say, a simple moving average
crossover. And you also have to consider the candle chart itself, which
generates buy and sell signals from
various patterns. Furthermore, say
Japanese market participants, you
should not rely on one signal alone.
One of the advantages of the chart
is that it combines several analytic
techniques. Considering them together can make for a more enlightening analysis.
Yet even if you follow all these
rules, you probably wont become an
expert in reading this chart anytime
soon. In addition to other obstacleslike the facts that no charting
technique is right all the time and
that a chart is only as good as its
interpretersome Japanese say it
takes 10 years to become a specialist
in this particular technique. Whether
thats true or not, the big question
is, Does it work? Only timespent

Figure 2. Tab in, change the ending date to 07/13/95 and press <Go>. The
buy signal was confirmed when the lagging span rose above the price from
26 days earlier

looking at the chart as market action


developscan tell. Still, we can look
back at some interesting formations.
To see the general overview chart
for Japanese yen daily spot trade, for
example, type JYS <Crncy> GOC D
<Go>. Tab in, change the ending
date to 06/13/95 and press <Go>
(figure 1). Youll notice several valuable points, including a crossover of
the two leading spans on July 18, with
leading span 1 crossing above leading
span 2. This is the first buy signal, yet
the price candle is right in the midst
of the cloud and the lagging span is
smack on the price of 26 days ago.
Now, tab in again, change the

ending date to one month later


07/13/95and press <Go> (figure
2). Observe that the lagging span
rose above the price of 26 days ago
and the price candle broke out above
the cloud, confirming the positive
signal generated by the leading span
crossover a month earlier.
Finally, change the ending date
back to today and press <Go> (figure
3). If you had used these signals as
a signal to buy the dollar at 84.5 yen,
you would have caught the move up.
The Japanese bond market is
another obvious candidate to examine from this perspective. To find
out, for example, whether yields
have finally bottomed, type GJGB10
<Index> GOC D <Go>. Japanese
traders say this chart is equally effective regardless of the underlying
market, be it U.S. stocks or Japanese
red azuki beans.
The thing is, even if its beans
youre studying, youll be looking
at the same chart a lot of Japanese
traders look at. That means that
whether or not you end up using it
for buy and sell signals, the general
overview chart may still light the way
into Japanese market players minds.

CRNCY

Any comments? Type MAGAZINE


<Msge>. For reprints, type BAN <Go>.

Figure 3. Type JYS <Crncy> GOC D <Go>

James Rolle is an applications


specialist for Bloomberg in Tokyo
bloomberg march 1996 45

You might also like