Hello, welcome to this edition of Cantos Charts. I'm Ashraf Laidi from CMC Markets. We are going to look today at the relationship between the Nikkei 225, the main equity index from Japan, in relation with the Dow Jones from the US.

Now many of you have been looking at equities and been looking at all these highs and 12, 13-month highs in the US. But what is interesting here is that if you look at the Nikkei, this is the daily chart of the Nikkei Index in Japan, and last week we went to the lowest level since August. That's a three-month low. Although the Nikkei was first to get to the 10,000 level before the Dow Jones did, it is actually falling well ahead or before the Dow.

But what is interesting is that this is really a classic head-and-shoulder formation, which is a bearish formation. You've got a shoulder here, a left shoulder, and you've got the consolidation at the top which is the head and the right shoulder. And you've really got the neckline around the 9,646 which really broke.

But rather than just looking and remaining fixated on this chart, I'm going to put this chart which looks at the ratio of the Dow Jones index to the Nikkei index. And as you can see, this is a weekly chart and I've looked at the technicals of the ratio. And what you see here, you've got the highest level meaning the Dow relative to the Nikkei is at its highest level this year. Actually it's the highest level since December.

Now what is interesting is that if we look at the technicals of this relationship you will see that the technicals here of this relationship of this ratio they have a tendency to be overstretched as looked by the relative strength index on top of the chart right here. And basically we are reaching the 70 per cent level. The last time we reached the 70 per cent level in the RSI was really back in November. And guess what happened in November? We got the big up-move here after which there was a big decline. That decline really happened around November and December.

And if you just incorporate some of the fundamentals into this, one of the main reasons that US indices are really doing very well is dollar weakness. That is not the case for Japan. You've got a strong yen in Japan and the Nikkei is going down. What is interesting here is that could dollar weakness be the only reason or the main reason for rising US stocks.

The last chart here is the Dow Jones index. And this is a very important level. This is a very important level, 10,335, really marks the 50 per cent retracement from the all-time high in October 2007 to the March low. When you retrace 50 per cent you get 10,335. Now some of you said "well, we've reached 10,400 last week." Well, here is the thing. Last Monday we went above 10,300. Last Tuesday we did the same thing. Last Wednesday we did the same thing. However, last Friday we did not close above the 10,335. That is to say we did not have a weekly close above that. That is what is very important.

Interestingly if you look at the S&P still has not closed above it on 50 per cent which is 1120 but the Dow did have a daily close but not a weekly close. The markets are looking at this. The message of the markets is that even though the Nikkei is not doing so well, it is coming down and the pattern is very, very negative, the Dow Jones looks not only overstretched relative to the Nikkei and to the S&P but when you look at the Dow Jones itself it has yet to close above that key level.

This is Ashraf Laidi with this edition of Cantos Charts.