Wednesday’s ETF Chart To Watch: Japan Small Cap Fund (DFJ)

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Equity markets appear to be regaining their footing in the first few trading days following last week’s dismal sell-off. Bargain buyers have stepped in as major stock indexes are holding above key support levels. Keep in mind however that the bounce higher can quickly turn into another leg-lower if Euro zone debt drama makes its way into the headlines. On the home front, investors were happy to see better-than-expected existing home sales; the April figure came in at 4.62 million versus the previous reading of 4.47 million [see also ETF Insider: Be Wary Of A Dead Cat Bounce].

Japanese stocks will come into the spotlight later today as investors react to the latest Bank Of Japan interest rate decision. As such, our ETF to watch for the day is the WisdomTree Japan Small Cap Fun (DFJ) which may gap in either direction as Wall Street’s opening bell kick-off trading today. Analysts are expecting for the rate to remain unchanged at 0.10%, although the economic commentary issued after the decision itself often times sheds valuable insights on the health of the economy [see also India Bull Or Bear? ETFs To Play].

Chart Analysis

Consider the 2-year daily chart for DFJ below. Since hitting a low at $35.75 a share on 3/15/2011, this ETF has oscillated within a fairly well-defined trading range. Notice how DFJ has major support around $40 a share, seeing as how it has managed to bounce off this level on several occasions throughout 2011. Also, take note of the resistance; this ETF has trouble hurdling over $44 a share, while major resistance lies at the $46 level, which has not be breached since 2/28/2011 [see also 3 ETF Trading Tips You Are Missing]. 

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DFJ is in a tricky spot at the moment because it is towards the lower-half of its trading range, which makes establishing a long position lucrative; however this ETF may easily sink to $40 a share, seeing as how that is the next major support level, which makes a long position at these levels a bit more speculative.

Outlook

If the economic commentary following the latest Bank Of Japan rate decision paints an optimistic outlook, Japanese markets could have the wind at their back. Likewise, a positive reaction may bolster DFJ higher on the day, although caution should be exercised as it nears potential resistance around $42.50 a share. On the other hand, a bearish reaction to the latest interest rate decision can easily sink this ETF below $41 a share, with the $40 level being the next area of major support. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit taking techniques [see also Using ETFs To Measure Interest Rate Risk].

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Disclosure: No positions at time of writing.

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