Chart Of The Day: Trading The Yen's Surprising Decline

The yen slipped 1.75 percent last week, its worst decline in 10 months. Why would Japan's currency be edging lower, even against a weaker dollar? While no obvious fundamentals appear to be the significant driver, perhaps a bit of underlying market psychology explains the transition in the supply-demand balance.

Could the USD/JPY slide underscore a shift in investor sentiment, away from global trade worries, back into risk assets? Conceivably the growing interest rate differential, favoring the dollar versus the yen, might be seen as a catalyst for the yen's downward move, whose non-existent yield risks now overshadow its haven status.

However, the fact that the widening rate gap between the US and Japan didn't just take shape last week seems to point to the fact that there isn't a single key fundamental trigger that can independently explain the price move. Perhaps there's a perfect storm of political and economic events now weighing on the Japanese currency.

The USD/JPY has been trading within a consolidation between May 22 and June 29. This means the price failed to achieve new highs or lows.

The shape of the pattern was a symmetrical triangle, in which buyers kept bidding prices up, even as sellers kept bidding prices down, forming a convergence of higher lows and lower highs. The upside breakout demonstrates a shift in the balance, as buyers absorbed all available supply within the consolidation and bid prices higher in search of new, willing sellers. This upward move, above the clearly defined borders of the pattern, presumably triggered both stop-losses for shorts and entries for longs, adding to the demand and propelling prices higher.

The study of technical analysis is done by applying the weight of the evidence. When different factors point in the same direction, it is considered a more reliable indicator. We therefore consider this upside breakout, which formed a pennant, exceptionally significant, as it includes several, different technical triggers that form a clear picture.

The pennant took shape right beneath a falling trendline since June 2015, demonstrating the importance of this location on the technical map, spurring an all-out struggle between bulls and bears. The upside breakout of the pennant was soon followed by a crossing above the 3-year downtrend line, as the bulls kept bidding prices higher, encouraged by the dual breakthrough to find more willing sellers.

The 50 DMA (green) crossed above the 200 DMA (red), along with the price crossing above the long-term downtrend line, executing a Golden Cross, which happens when recent price data outperforms the longer-term rate average. Note that, ironically, the 50 and 100 DMAs slithered precisely through the triangle apex, giving the pattern a demonic appearance. Could it be an omen of what's to come for the yen?

h3 Trading Strategies – Long Position Setup/h3

Conservative traders would probably wait for a correction to confirm that the 3-year downtrend line, formerly resistance, had turned to support, a sign that long-term market psychology has flipped. They might also want to see that the rising channel since March confirms its bullishness.

Moderate traders may wait for a correction, for a better entry, but not necessarily for support confirmation.

Aggressive traders may enter at any time, providing they have an equity management plan that complements their account, as well as achieves a minimum 1:3 risk-reward ratio.

Get The News You Want

Read market moving news with a personalized feed of stocks you care about.

Get The App

Written By: Investing.com