Likely Fake Inverse Head And Shoulders In The Yen
Trader Moe | Dec 16, 2014 12:23AM ET
The yen futures contract has lots of contradictory signals on its chart.
There’s a potential inverse head and shoulders on the chart that started forming in late November with a right shoulder that should have broken out upwards today, but failed to do it. The last time the yen formed this type of inverse head and shoulders (in early 2014), it failed in the same way (in June 2014).
One thing that suggests this inverse head and shoulders will fail is the rising megaphone formation (blue on chart) that returned the yen to the inverse H&S neckline before the right shoulder. Rising megaphones are a sign of bullish excess, and they almost always lead to a reversal.
In this case, the yen has been moving sideways since its downward breakout from the blue rising megaphone, but that’s pretty normal for any rising wedge breakout. Usually the sideways formation will complete and then the price will head down.
The sideways pattern that the yen has formed since breakout from the rising megaphone looks like it’s trying to be a triangle (green scenario), although it’s at a point where it could easily morph into a head and shoulders (purple scenario) or megaphone right shoulder.
Usually a triangle right shoulder would break the price out of an inverse H&S in the expected direction, but in this case the triangle looks like a topping triangle. The tell is that the most recent wave up in the formation was a drawn-out, conflicted move. I would expect to see that either in a triangle that’s going to break out downwards or in a triangle that’s going to morph into a head and shoulders or megaphone that will break out downwards.
If despite expectations the yen breaks out upwards, it’s a set-up to go long, but you should be a little slow about it. This is a perfect set-up for multiple fake breakouts upwards.
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