The focus in the next two weeks will be on the U.S. inflation numbers and payroll data.

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The TOPIX index has broken out from a three-month ascending triangle, initiating the next upward leg.

The Japanese yen continues to weaken against the U.S. dollar, despite a recent narrowing of the yield differentials between the U.S. and Japan, a divergence that only recently emerged.

With the weakening of the Japanese yYen against major currencies, AUD/JPY is at the upper resistance of a multi-decade channel, increasing the likelihood of a pullback.

Live Cattle futures are on the verge of breaking out from a ten-month symmetrical triangle. A confirmed breakout could trigger a strong continuation rally.

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It’s that time again. As we witnessed the first U.S. presidential debate of 2024, memories of the 2016 and 2020 elections resurfaced for many investors. Although this series is not intended to provide political commentary, it is crucial to remain mindful of the impact brought by potential regime changes on the financial markets. Market sentiment and expectations can shift significantly, and the last thing we want is to be caught offguard in our investment or trading strategies.

On Friday, the “Magnificent 7” had a down day, with Nvidia sitting at more than 10% below its high last week. However, in the broader context, Friday’s decline in mega-cap tech stocks is a minor blip, barely noticeable when considering their substantial gains since the beginning of 2023. Despite this, we find it challenging to maintain enthusiasm for the U.S. equity market, particularly tech stocks. The recent parabolic rally appears overextended, and with heightened volatility on the horizon, investors are starting to shift their focus away from the AI frenzy and consider the potential implications of the 2024 U.S. election outcomes. In our view, when a rocket shoots straight into the stratosphere and exhausts its fuel with thin oxygen, it doesn’t simply cruise at altitude; gravity takes over, and the rocket falls back to the troposphere.

This perspective leads us to consciously avoid the FOMO (fear of missing out) mentality in the U.S. equity market. While there is potential for further gains, we do not favor the risk-reward balance. Instead, we are eagerly looking for opportunities elsewhere. One such place is Japan, which we have frequently revisited this year. While the Nikkei 225 index is consolidating after an impressive run earlier this year, the TOPIX index appears more constructive from a technical standpoint. It recently hit a 34-year high, driven by the outperformance of Japanese financials as bond yields rose. A long-term theme seems to emerge as Japan continues to normalize its monetary policies.

Additionally, as mentioned in our previous commentary, we are closely monitoring the livestock market, which is poised for a significant run, but remains under the radar for many investors. A positive weekly and monthly close further confirms our bullish bias towards both feeder and live cattle.

In summary, while the U.S. equity market, especially tech stocks, presents a challenging environment due to overextension and upcoming volatility, we are optimistic about opportunities in Japan and the commodities market. Staying vigilant and adaptable in our investment approach will be key to navigating these evolving market conditions.

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We consider expressing our views via the following hypothetical trades¹:

Case study 1: Long USD-Denominated TOPIX futures

We would consider taking a long position on the USD-denominated TOPIX futures (TPDU4) at the present level of 2811, with a stop loss below 2770, which could bring us a hypothetical maximum loss of 2811 – 2770 = 41 points. Looking at Figure 1, the TOPIX index has the potential to continue to climb to 3000, a hypothetical gain of 3000 – 2811 = 189 points. Each point move in the USD-denominated TOPIX futures contract is USD 50. Yen-denominated TOPIX futures are also available, with each point move being JPY 5000. USD-denominated TOPIX futures allow investors to participate in the index without USDJPY exposure.

Case study 2: Long Live Cattle futures

We would consider taking a long position on Live Cattle futures (LEZ4) at the present level of 186, with a stop loss below 182, which could bring us a hypothetical maximum loss of 186 – 182 = 4 points. Looking at Figure 4, if the breakout from the symmetrical triangle is confirmed, Live Cattle futures price has the potential to reach 197, a hypothetical gain of 197 – 186 = 11 points. Each Live Cattle futures contract represents 40,000 pounds of live cattle, and each point move is USD 400.

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A look into history could help us position ourselves better for the future. This section provides a rundown of market moves across major asset classes between April and June.

The Nasdaq to Russell 2000 ratio has surged parabolically, surpassing the Dot-com era highs, reflecting the staggering outperformance of tech stocks over small caps.

The Nikkei 225 index is gradually moving higher after briefly surpassing 40,000 in March. Unlike the TOPIX, the Nikkei 225 still faces several hurdles before its next upward leg.

The Russell 2000 index has been stagnant since early 2024 but is nearing the apex of a symmetrical triangle, suggesting an increased probability of a breakout.

The euro has been range-bound against the U.S. dollar for over a year, potentially forming a diamond pattern, which typically signals a reversal. Continued Eurozone monetary easing could push EUR/USD towards parity.

Similar to AUD/JPY, the yen has weakened against the euro to levels that were last seen three decades ago. EUR/JPY is also primed for a pullback due to its rapid ascent.

USD/CNH has been steadily rising since a minor pullback in May. It remains to be seen if it can decisively climb above the trendline support.

The U.S. dollar continues to strengthen against the Brazilian real. USD/BRL has completed a multi-year cup-and-handle pattern, consolidated in a symmetrical triangle, and recently broken out, resuming its uptrend.

The U.S. 10-year yield has been moving higher within an ascending channel since 2022 and is currently at channel support.

After breaking out from multi-year resistance near 2,100, gold has been consolidating between 2,300 and 2,400. The bullish technical setup remains intact as long as the 2,300 support holds.

Silver experienced a significant pullback from its high of 32. A break below 28 could lead to a further decline towards the next support at 26.

Platinum remains in a multi-decade descending triangle. With political uncertainties in South Africa and cost-cutting measures by major miners, platinum is poised for an explosive move when supply shortages materialize.

Palladium has plunged over 70% from its 2022 high and appears to have found critical support.

Feeder Cattle futures prices have broken out from a symmetrical triangle continuation pattern, resuming the rally.

Similarly, Live Cattle futures are poised to break out from a symmetrical triangle continuation pattern imminently.

¹ Examples cited above are for illustration only and shall not be construed as investment recommendations or advice. They serve as an integral part of a case study to demonstrate fundamental concepts in risk management under given market scenarios. Please refer to full disclaimers at the end of the commentary.

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