Many investors are familiarwith candle charts, theJapanese twist on the stan-

dard bar chart that shows opening,high, low and closing prices for eachperiod. By using a candle shape andshading it when the closing price is below the opening price, the Jap-anese added a visual enhancementthat has helped many a trader shine.

The fact is, Japanese traders havebeen using charts for hundreds ofyears, dating back to the early days of rice trading. When you add that tradition to the large amount ofmoney Japanese institutions control,it’s obvious why candle charts mightshed some light on what Japanesemarket players think. You can getpart of the way via Bloomberg’sGeneral Overview Chart (IchimokuKinkohyo in transliterated Japanese,also known as Ichimoku Sanjin).

For example, let’s check out thegeneral overview chart for the Nikkei225 index. To bring it up, type NKY <Index> GOC <Go>, where, in

addition to a standard candle chart,you’ll see five additional lines thatidentify trading opportunities. Thelines are delineated in the key, butthey require further ex-planation. Briefly, theconversion line takesthe midpoint betweenthe high and low pricesfor the previous ninedays, the base line takesthe midpoint betweenthe highs and lows forthe previous 26 daysand the lagging span is simply today’s closingprice charted 26 daysago. The last two linesare the leading span 1,or the average of thebase and conversionlines charted 25 daysinto the future, and theleading span 2, or the average of the highs and lows for 52 days, plotted25 days into the future.

If you think unraveling the lines is

tricky, figuring out what they tell usabout future price movement is trick-ier still. Some general rules can help. For instance, the area between

the conversion line and the base line is calledthe resistance zone orcloud. Analysts considerthis the support/resis-tance area. In otherwords, if the price can-dle is above the zone, it sets a floor, which in-dicates strength and a good opportunity tobuy. Conversely, if thecandle is below, it maybe a signal to sell.

When a rising marketpicks up speed and be-comes overheated, thebase line is likely to rep-resent the support level

that would stop the eventual price decline. When the conversion linecrosses the base line from below, it may indicate a good time to buy.Similarly, when the conversion linecrosses the base line from above, it’s a sell signal. (The conversion line is normally above the base line in a rising market.) The crossover alsoprovides a measurement for the running market strength and the potential for any further rise.

In general, when the price candlelies above the base line, the markettrend is bullish. If the candle liesbelow the base line, the market trendis bearish.

Now let’s look at the lagging span,which is supposed to read the flow of the market by comparing today’sclose and the close from 26 daysago—somewhat like the Rate ofChange function, ROC. The span in-dicates the market’s strength by itsposition relative to the price of 26days ago. When the lagging span is

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Following Japan’s Lead in Price ForecastingGet a handle on general overview charts, and you mayend up illuminating Japanese market mentality

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Figure 1. Type JYS <Crncy> GOC D <Go>. Tab down, change the endingdate to 06/13/95 and press <Go>. The first buy signal occurred when leadingspan 1 crossed above leading span 2

when the

price candle

lies

above the

baseline,

the market

trend

is bullish

above the market level of 26 days ago,it generally indicates strength and,so, a good time to be long. When it isbelow, it may represent a signal tosell. When you see a crossover of thetwo leading spans, it may indicate achange in future direction. Normal-ly, leading span 1 is above leadingspan 2 in a rising market.

Naturally, as with any technicalchart, caveats are in order.For instance, the formation

works best in certain market situa-tions and requires more thoughtthan, say, a simple moving averagecrossover. And you also have to con-sider the candle chart itself, whichgenerates buy and sell signals fromvarious patterns. Furthermore, sayJapanese market participants, youshould not rely on one signal alone.One of the advantages of the chart is that it combines several analytic techniques. Considering them to-gether can make for a more enlight-ening analysis.

Yet even if you follow all theserules, you probably won’t become anexpert in reading this chart anytimesoon. In addition to other obsta-cles—like the facts that no chartingtechnique is right all the time andthat a chart is only as good as its interpreter—some Japanese say ittakes 10 years to become a specialistin this particular technique. Whetherthat’s true or not, the big questionis, Does it work? Only time—spent

looking at the chart as market actiondevelops—can tell. Still, we can lookback at some interesting formations.

To see the general overview chartfor Japanese yen daily spot trade, forexample, type JYS <Crncy> GOC D<Go>. Tab in, change the endingdate to 06/13/95 and press <Go>(figure 1). You’ll notice several valu-able points, including a crossover ofthe two leading spans on July 18, withleading span 1 crossing above leadingspan 2. This is the first buy signal, yetthe price candle is right in the midstof the cloud and the lagging span issmack on the price of 26 days ago.

Now, tab in again, change the

ending date to one month later—07/13/95—and press <Go> (figure2). Observe that the lagging spanrose above the price of 26 days agoand the price candle broke out abovethe cloud, confirming the positivesignal generated by the leading spancrossover a month earlier.

Finally, change the ending dateback to today and press <Go> (figure3). If you had used these signals as a signal to buy the dollar at 84.5 yen,you would have caught the move up.

The Japanese bond market is another obvious candidate to ex-amine from this perspective. To findout, for example, whether yieldshave finally bottomed, type GJGB10<Index> GOC D <Go>. Japanesetraders say this chart is equally ef-fective regardless of the underlyingmarket, be it U.S. stocks or Japanesered azuki beans.

The thing is, even if it’s beansyou’re studying, you’ll be looking at the same chart a lot of Japanesetraders look at. That means thatwhether or not you end up using itfor buy and sell signals, the generaloverview chart may still light the wayinto Japanese market players’ minds.

¬Any comments? Type MAGAZINE<Msge>. For reprints, type BAN <Go>.

James Rolle is an applications specialist for Bloomberg in Tokyo

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Figure 2. Tab in, change the ending date to 07/13/95 and press <Go>. Thebuy signal was confirmed when the lagging span rose above the price from 26 days earlier

Figure 3. Type JYS <Crncy> GOC D <Go>