"Let us leave the place where the smoke blows black,
And the dark street winds and bends...
Yes we'll walk with a walk that is measured and slow
And we'll go where the chalk white arrows go."
-- From Shel Silverstein's "Where the Sidewalk Ends"
The first half of the above poem describes a place much like the main "street" of conventional economic wisdom. There, the voices of reason "wind and bend" fundamentals around financial market movements in hopes of assigning outside causes to certain price effects. This, dear readers, is not science -- it's mostly fiction.
For a real-world example, see recent news coverage of the US Dollar/Japanese Yen. The hot topic: the yen's sudden winning streak to one-week highs against the U.S. note. According to the usual sources, one main factor has flipped the yen's bearish switch: A falling stock market -- namely, Japan's Nikkei index. On this, the following web clips say plenty:
- "The currency of Japan spiked high against its main opponents as a slump in the majority of Asian-Pacific stocks prompted risk averse traders to look for safe-haven assets." (Ecommerce Journal)
- "Flurry Of Risk Aversion Boosts Yen" (Forex District)
- "Yen Surges Up On Weak Asian Stocks: Low yielding currencies like the yen will gain when the shares fall as they are seen as safe havens in times of economic uncertainty." (AP)
The problem is, there's no consistent inverse correlation between the Yen and stocks over time. To wit: This recent history of the two markets, from newest to oldest:
- March 1 to April 1, 2010: Yen falls to a seven-month low; Nikkei rallies.
- February 18 to March 1: Yen rises; Nikkei rises.
- January 7 to February 4: Yen rallies to two-month high; Nikkei falls to below 10,000.
- April 2009 to December 1, 2009: Yen rockets to a 14-year high against the dollar; Nikkei soars to its highest level in 14 months.
So, that leaves us to explore the other place described Silverstein's poem: There, we "walk the walk that is measured and slow" -- i.e. careful and objective Elliott wave analysis. And, we'll go to where black "arrows" are drawn on labeled charts to indicate the next likely direction in prices. This place is EWI's Currency Specialty Service.
One of the latest Currency Specialty Service forecast features the following close-up of the USD/JPY (minus certain Elliott wave labels).
As you can see, price action from late March has unfolded in a clear, five-wave move. After five waves comes a three-wave correction, Elliott tells us. So, the gains in the yen since its completion have been part of a requisite three-wave correction. Whether that downtrend is near its end is a question best answered by Currency Specialty Service's in-depth analysis.