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Many active investors try to monitor hedge fund positions to get an idea of what the “smart money” is doing, and now some are making big bets on Japan. But the technical action, says MoneyShow’s Tom Aspray, suggests they may be betting on the wrong side.

Even though last Friday’s rally was not that impressive, it did lessen the downside pressure on the stock market, and early Monday stock futures have added to last Friday’s gains.

There are still quite a few hurdles facing the stock market (Gaza, Greece or the Fiscal Cliff?), and there are no signs yet the US market’s decline is over.

Some of the other global markets continue to act much better. Japan’s Nikkei-225 Index is up over 6% since last Tuesday’s low, including a 1% gain in Monday’s session. Despite the worsening economic news out of Japan, the index is now just 1.5% below its September high.

It appears that many of the big hedge funds are betting on more weakness, as they are bidding up the prices of credit-default swaps on some of Japan’s largest companies.

So far this trade is working for them, but several well-known hedge fund managers were proclaiming their bullish stance back in early 2011 and the Nikkei fell 17% for the year. Does the technical outlook support their stance now?

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Chart Analysis: The weekly chart of the Nikkei-225 Index peaked in February 2011 at 10,891, and the long-term downtrend (line a) is still intact.

  • As of last Friday, the Nikkei 225 is up 1% in November, versus a 3.9% decline in the Spyder Trust (SPY)

  • In 2012, the Nikkei has formed a series of higher lows (line c), with next resistance at 9,300 (line b).

  • The weekly on-balance volume (OBV) has turned up from yearlong support (line d).

  • A move in the OBV above its WMA and the downtrend (dashed line) are needed to signal that a bottom is in place.

  • There is first support now at 8,800 to 8,900, and then at 8,650 to 8,700.

The weekly chart of the CurrencyShares Japanese Yen Trust (FXY) shows that a three-year head and shoulders top appears to be forming. A close below the neckline at $118.50 is needed to confirm the top formation.

  • FXE peaked in September at $125.85. Once below $118.50, the next good support sits in the $115 area.

  • The major 38.2% Fibonacci retracement support is at $111.32, with the 50% support at $105.40.

  • The MACD-His peaked as the LS (left shoulder) was forming, and made lower highs as FXE was peaking in 2011.

  • The MACD-His was even weaker in September, and the negative divergence (line f) is consistent with a major top.

  • The drop in the MACD-His below the zero line last week (see arrow) is also a sign of weakness.

  • The weekly OBV is still holding above its WMA. and is well below the uptrend (line g).

  • There is initial resistance at $122.60 to $123.30. Major resistance follows at $125.36, which was the RS high.

NEXT: Which Way Should You Invest in Japan?