New Column up at Real Money (10/27/05): Combining Technicals and Economics


Not too long ago, I recieved an email asking me about the difficulties
of combining Technical and Economic Analysis. I thought it might be
instructive to look at an index as an example of the Techni /economic
approach. Its an interesting challenge, with not that many people on
Wall Street actively using both disciplines.

Here’s an excerpt:

What made me think of this was a column today by Helene Meisler, Think About Taking Profits on Japan. As a trader, Helene has turned bearish on Japan, while I have not.

I previously recommended Japan iShare EWJ; It was between $6-7. The reason for the rec was that Japan’s economy was showing signs of life, with GDP and consumer spending improving. But the key at the time was the Chart:<spacer>

iShares MSCI Japan Index (EWJ) 2000 – June 03


EWJ saw increasing volume as it tried to re-enter the previous trading range. The prior support was now resistance. Once it got over that level in the low 7s, the technical breakout confirmed the improving economics.

Helene bases her sell signal on a "black cross" — where a rising five-day moving average cross es down through an also-rising 25-day moving average.

Using the same analysis, as long as
the new trading range holds, and the economic expectations for Japan
remain expansionary, long term investors can stay long. The same strategy that got me in, keeps me in: 


iShares MSCI Japan Index (EWJ)  January 2003 – October 2005
click for larger chart

The same approach is what has me increasingly worried about the US equity markets next year. The key is using the technicals to help with the timing. Even though the economic backdrop is not at all encouraging, it is too early to short prior to a technical/quantitative/sentiment signal.

Pretty straight forward . . .


Still Seeing Upside in Japan
Barry Ritholtz, 10/27/2005 3:10 PM EDT

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  1. Eric Lamb commented on Jan 10

    Any updates to this chart??

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