Trading Japan’s EWJ
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Chart courtesy of FusionIQ, Bloomberg
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I wanted to follow up a post from last year about EWJ. Back in December ’10, I mentioned 10 Reasons I Am Thinking About Japan. Regardless of your views going forward, if you owned or traded this, you should have had a plan in place, and executed your strategy on it.
I wrote than “Note how many times EWJ got turned back at $11. What would get me really excited was a high volume breakout over $10.90-11.”
EWJ did manage to get over $11, kissing $11.60 — but on rather mediocre volume. If you were thinking about a big position, the lack of volume should have kept you small (or out altogether).
Regardless, you should have followed your discipline. It could have included such rules as:
• Buy the stock on a high volume breakout over $11 (1st chart here)
• Sell the stock when the uptrend is decisively broken (Red circle)
• Buy the stock when it falls back to support at $9 -9.50 (Green circle)
You will never know when an event(s) such as an Earthquake/Tsunami/Nuclear accident will occur, but you certainly can have a trading plan in place way before hand. Having a plan, and having the discipline to execute that plan is crucial to success as an investor or trader . . . .
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March 15th, 2011 at 12:09 pm
Barry, excellent post.
Trader psychology and exit strategies are 2 of the most important aspects of winning trading, yet many traders ignore them.
Many lack any set of rules whatsoever, and while we don’t all trade the same set of rules, having ANY in place is far wiser than having NONE in place.
March 15th, 2011 at 12:16 pm
Those who want exposure to Japan buy should be looking not at the big caops, but the small cap indices such as DFJ, SCJ, and JSC
March 15th, 2011 at 12:22 pm
I wouldn’t touch that trade with a ten foot pole. This could be the beginning of the end for them and I know you know I mean you no insult. That is why there is (usually) a buyer and seller on every side of a trade
March 15th, 2011 at 12:24 pm
Marc Faber…”If a melt down occurs, all bets are off”..
http://www.zerohedge.com/article/marc-faber-japanese-disaster-20-market-correction-and-qe18
EWJ was forecast for a major cycle peak roll over..
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=160_japanese-stock-market-forecast-post-2011-earth-quake-2011-03
Marc Faber and Kyle Bass have very different views
http://www.readtheticker.com/Pages/Blog1.aspx?65tf=151_marc-faber-bullish-on-japan-cycle-review-2011-03
Japan debt has just exploded, a down grade of Japan in the next 6 months is very likely, and the world bond vigilantes will want more for their risk, world wide, you can bet on that !
March 15th, 2011 at 12:39 pm
Many will look at the same charts and see a different trade…based on systems and time-frames…
counter trend traders and mean- reversionists are long here,
trend followers were already short on Thursday or Friday, based on the entry signal used. Most channel breakout systems generated a sell signal in EWJ on Thurday and Friday based on x-day breakout to the downside, which is where I am.
March 15th, 2011 at 12:45 pm
Wouldn’t that mean you would never have gotten to the red circle as you would have been taken out the two-three other times it went over the line?
~~~
BR: No. Those line touches pre-date the December buy discussion.
Additionally, its not the touch, but when the “uptrend is decisively broken” — the next trading session looks about $11 even
March 15th, 2011 at 12:47 pm
Barry…I really hope this areticle is not in response to some jackwagon calling you out over this call. NO ONE should be held to taks for Holding Japan in a portfolio and then havin this happen.
March 15th, 2011 at 12:48 pm
No one said anything, but since I mentioned it back in December, I thought it appropriate to update the iscussion
March 15th, 2011 at 12:52 pm
I agree with curbyourrisk. First off, you cannot be held accountable for someone being long before something like this happens, especially if they sold off only because of fear and not because they had an underlying investment idea in place. Second, I thought Japan made for a good investment when you first commented and this there are some great deals in there now as well. Some very strong companies went on sale over the past 2 days and I for one enjoy shopping in these kind of environments.
March 15th, 2011 at 12:57 pm
Permit me to add a 4th leg to this trade:
#4 If you choose to act on Item #3 (buying EWJ in the 9.00-9.50 support area) it is critical to incorporate stop loss again or use other risk management measures. In my opinion this is always important, but in this instance it is doubly so.
First, from a technical analysis point of view if that support is broken there isn’t any support of consequence until the $7.50-$7.70 area.
Second, and more important, we have no way of knowing or even guessing with confidence what the next few days will bring in Japan. We are captive to headlines and the whims and vagaries of unstable and unknown: (a) core temperatures, (b) structural stability, (c) fission, (d) Roentgens Rads and Rems, (e) winds, and (f) mass psychology. Talk about a recipe for unpredictability.
So if you choose to trade, trade intelligently and don’t let a modest loss turn into a disastrous one.
T.U.B/RF
March 15th, 2011 at 12:59 pm
Totally agree — EVERY position should have a pre-determined exit strategy
March 15th, 2011 at 1:04 pm
So what if it was the right or wrong call…people place too much of a premium on being “right”
Some of the best systems traders in the world are immensely profitable with less than 50% win rates…the key is to have your winners be distribution multiples of your losers.
If a system generates 200 trades a year, and only 40% are “winners” and 60% are “losers” but the winners gain 2% and the losers “lose” 1%, as an example, this system generates a 40% a year return.
200 x 40% winners = 80 trades x 2% win rate = +160
200 x 60% losers = 120 trades x 1% loss rate = -120
Net = +40%
The win rate is much less importat then system expectancy.
So if the call on Japan was right or wrong, its no big deal. Size the bet properly, have stops in place and move on to the next trade.
March 15th, 2011 at 3:46 pm
[...] • Trading Japan’s EWJ [...]
March 15th, 2011 at 3:54 pm
Wouldn’t individual companies still be a good bet? They have to rebuild the roads, trains, docks, etc, and those nuclear power plants need replacing.
March 15th, 2011 at 4:15 pm
Regards Marc Faber’s view on Japan:
I believe his main fundamental point is that JGBs are disproportionately owned by the populace, and equities are very much under owned.
Thus, if/when the Yen falls apart and the Japanese start finally experience inflation, Faber expects a substantial move out of bonds, and into equities. And given the Japanese current minimal equity allocations, it won’t take much the TOPIX to get a move on.
And Faber is very bullish on Japan, his only negative comment is “If there is a total meltdown.” So to cite that as bearishness…. Ha. Not quite.
March 15th, 2011 at 8:02 pm
I bought EWJ at about 10.70 then sold at 11.41 about three days before the earthquake out of boredom…WINNING…though I only have a small amount of money in the market :(
March 16th, 2011 at 10:36 am
Thanks to Barry for pointing out EWJ a while back. I couldn’t resist to put in 15% of my capital into EWJ yesterday which seemed oversold after it rebounded from $9.20 with $9.00 as my stop loss. This is definitely a speculative trade and I understand it may go lower if the nuclear crisis gets worse.
March 17th, 2011 at 11:13 am
I’ve been following EWJ for the past year. This would make an interesting short trade if it breaks through the $8.50 mark.
March 19th, 2011 at 7:14 am
[...] mentioned previously, stick with the small cap funds (DFJ, SCJ, and JSC). The large market cap ETF (EWJ) is not the [...]