The rally in the yen continued this week as the Japanese currency hit a 17-month high against the dollar. Historically, super strength in the yen has signaled times of trouble for the market, and according to one technician it could be foreshadowing a major downturn in U.S. equities.
"This might be the center of the storm and actually be the sort of black swan event that takes the S&P to the downside," Carter Worth told CNBC's "Options Action" on Friday. A black swan event is a term used in the financial markets that describes an occurrence which comes as a surprise to investors and sparks a wave of selling.
Worth expects that the yen will continue to strengthen, which will put pressure on equities in the U.S. and Japan. And looking at a chart of the S&P 500 versus Japan's Nikkei 225, he noted that for much of the last year the two traded in a tight correlation — that is up until recently.
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"The optics are quite clear. Everything started rebounding nicely and then the Nikkei has faltered and started to roll over," he said. "This is a problem. I ultimately believe that the S&P 500 is going to go that way as well," the head of technical analysis at CornerStone Macro added. "This is a bad place to be in."
The S&P 500 is slightly higher in 2016 while the Nikkei has fallen more than 17 percent — and Worth expects that weakness to continue. "The presumption is that we are precariously close to hovering at well-defined lows at a common level and we are going to break those lows," he said. "You can call it a head and shoulders but either way that's not a good setup and more often than not it resolved lower not higher."
