Buying YCL, Long the Japanese Yen, VIX at 6-year Lows



Today we offer a chart depicting both the Nikkei 225 on top and the yen at bottom.  Please be reminded that all graphics can be clicked to view a larger version.

Clearly the two have been inversely correlated for years, and we marvel that this index has risen an incredible 45% in four months, into an area of probable resistance between the two black horizontal lines:

The black arrows on the yen portion of the chart show the clear correlation to extremes in commercial hedgers (green) positioning.  This suggests that the current extreme, now lasting an unusual length of several months, could signal a near-term reversal in the yen.

Below is a close-up of the NIKKEI and yen showing that the inverse correlation may have ended the past week, which is a possible indication that the downward move in the currency is done and that a bounce is about to occur. 

Perhaps it'll be a massive short squeeze, as shorting the yen has been a very popular and profitable position.  You can see in the chart above that small traders have shorted it to extremes, and typically small traders don't do well for very long.

YCL is an ETF that's levered long the yen, and that's how we've chosen to play it, having entered half the desired position Thursday and we'll enter the other half Friday morning.  The usual caveats with respect to levered ETF's apply.  We'll put a closing stop at  $21.60 thereby risking approximately 5%

YCL may enjoy support at its current level, per the red line in this chart:

 
Today the VIX index hit a 6-year low while the DJIA set a 16-year record with 10 successive positive days. 

Here's a 6-month chart of the VIX which suggests a reversal in equities is due soon, as there appears to be a broken downtrend above (red) and a supportive trend below (black):

 

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