Another day pass and another high in USD/JPY is made. There seems to be no-end to Yen’s northbound journey and price has crossed the 94.0 yesterday. The early retirement announcement from current BOJ’s Governor heralded in more bullish traders looking for a earlier start date for the much talked about new stimulus package. It seems that everybody is happy with what Prime Minister Shinzo Abe has been doing so far. Many a times have we observed BOJ wishing to weaken yen only to fall flat on their collective faces. It is a good change to see the market siding with BOJ (or Shinzo Abe to be exact), and continuing to push Yen weaker. “Street Cred” is important not just for gangsters but apparently Central Bankers too. It is also mildly amusing to see Vice Finance Minister Nakao supporting Abe, saying that his economic policy – nicknamed Abenomics has been successful so far. Really Nakao? How do you measure success in this case? True impact of the BOJ stimulus can only be felt a few months down the road, if not much longer. Furthermore, Japanese economic data has not been encouraging, with Retail Trade and Industrial Production figures coming in worse than expected.
Well, but lets not get facts in the way of the bullishness shall we? USD/JPY is moving higher and that means that Abe and co. are happy. Trend traders are also happy especially if they had entered back when USD/JPY was below 80.0. So everybody wins right?
4 Hourly Chart
Maybe not, spare a thought for short sellers why have been betting for a reversal along the way. Now not all of these short sellers are dumb, many of them have done their analysis and believe that the stimulus package may not be enough to sustain a weak USD/JPY. Others may look at the global economic outlook and think that risk appetite may face strong reversal soon especially considering no progress has been noted since the OMT fiasco. However one thing short-sellers have failed to appreciate is the power of the masses. Mob opinion might not be rational, may be factually and objectively wrong, but they certainly get their way.
Looking at the rising wedge, and noting that recent dips are getting shallower, it seems that bears are finally understanding the power of mob-strength with lesser sellers willing to commit. This observation is confirmed with retail traders moving into Net Long positions. Some may interpret this as a bullish signal, but we need to remember that Net Position is generally used as a contrarian indicator.
What does this mean?
Well, for every single buyer, there must be a seller. Smart Money theory says astute investors, generally major banks and institutional investors (smart money), take opposite positions from retail traders (Dumb Money; notice how retail traders are net short for the entirety of the USD/JPY rally since price broke 80.0?). Now that retail traders are Net Long, who is going to sell to Smart Money? The risk is hence on the downside, where Smart Money realizing upside potential is limited due to lack of sellers, start to close out their positions and trigger a sell-off. Who will buy from the smart money then? Unfortunately it will be the Dumb Money, hence explaining how retail longs increased when USD/JPY retreated back in April – Oct -2012.
What is the moral of the story then? The risk of downside is higher than ever especially when price is so extended. However, don’t bet on it. Look at the small blue lump a on the chart above before current one. That is a failed signal which would have burned short sellers if they have entered early. Going back to the mob-mentality mentioned earlier, there is no telling when these rabid bulls will tire, but we do know that should they tire, expect the bears to come out stronger than ever.
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