Currency Secrets

Another interesting chart presenting some clear formations at the moment is also the USDJPY.

(Click here for chart)

What do we see?

Well after the Yen strengthened against the USD at the beginning of this month we saw it retrace back to its 50% Fibonacci retracement level, which it failed to break. Another interesting Fibonacci development is that we can currently see over the last couple of weeks the USDJPY’s failure in staying above its 38.2% retracement level (you can see plenty of daily wicks passing through this zone but not too many closes above it).

Add to that the fact that during this congestion period there’s a nice bearish pennant forming.

So what does it all mean? How would I trade this?

Well, for me personally, I’d be looking at opening SHORT positions around the 38.2% retracement mark (around 117.60-5) with stops outside the downward sloping pennant line (plus some breathing space) at 118.15 (giving us an initial ~50 pip stop loss). Otherwise, if the SHORT limit entry is missed I’d be looking to enter SHORT on stops at 116.85 (a break below the upward sloping pennant trend line) my initial stop loss would probably be around 40-50 pips away from entry, but upon it’s breakout I’d quickly move the stop down to the high (+10-15 pips) of the breakout bar.

My target for both entries would be the pole length, being the difference between the 100% Fibonacci retracement point (~121.60) and 0% Fibonacci retracement point (~115.20) on the chart, which gives me a target of 640 pips!

What if I were to get stopped out on the 117.60-5 at 118.15?

If I were to get stopped out I’d stop and reverse my position going LONG with stops back at 117.65 (50 pips). I’d need to be careful here as a pennant formation could very easily turn into a flag and I’d be watching the 50% retracement zone very carefully (~118.50). If we get a successful close above the 50% zone I’d be looking for the USDJPY to hit the 100% Fibonacci retracement on the chart as target - being 121.60.

If the market were to hit my stop loss on my entry stop position I would close all positions and would NOT reverse my position - I’d take the loss on the chin and move on to the next trade.

Please be aware that medium and long-term outlooks may look as though they are going to work in the short-term, however, with the nature of things in this world one event can quite easily unsettle these views/chart formations and throw everything out of whack quickly. Just because I have a long-term view doesn’t mean I keep it for months and months regardless of what is happening. As traders we need to be on our toes. I know my view(s) can easily change in a week or two depending upon price action… but I always hope that it remains for months and months, because then I’d know I’m making money!

Anyway, we’ll see how it goes.

The USDJPY broke the 50% retracement zone of Monday’s breakout candle and fell sharply to 108.80.

So where to from here? Do we have a falling three candlestick pattern?

We do.

While I personally prefer the falling three candlestick pattern to have a close GREATER than the 50% retracement zone of the breakout candle provided it doesn’t close below the LOW of the breakout candle I still hold the BULLISH candlestick continuation VALID.

Adding weight to the formation is yesterday’s close. As you can see from the daily chart of the USDJPY the close of the third consecutive down day finished RIGHT on what was once the resistance line of the ascending triangle.

This is known among traders as the change of polarity.

The change of what??

The change of polarity works as follows: previous resistance becomes new support, or, previous support becomes new resistance. In our USDJPY chart the “previous resistance” once was the ascending triangle’s flat top (being ~108.90), when price broke UP through this and began falling back down the change of polarity would kick in… i.e. support would now be seen at what was once resistance.

Why this phenomenon exists is anybody’s guess… but it does happen, and has been known to work many times.

Therefore, I’d be expecting the USDJPY to rally today. If it fails to close above 109.54 (the close of the original breakout bar) the pattern is failed. If it happens to travel below the low of the lowest low of the last three days the pattern would also be considered failed (this would be 108.66).

Again, just thinking out aloud.

The uncertainty of the USDJPY over the last two days adds power to the eventual breakout that will undoubtably occur… it’s just a matter of WHEN.

And that’s okay for forex traders, because we have the ability to place entry stop orders outside of the congestion range.

Stop entry order zones around this congestion would see 109.07 as the area to go short (as this is where support lay) and any break below this area will likely see further downside to 108.90 (and if 108.90 breaks expect further movement possibly to 107.40!).

As to the upside I would likely label 109.80 as the resistance zone with any break of this area seeing a potential move to 110.50.

Due to the fact that the USDJPY isn’t now showing any real strong signs of going anywhere I would expect another sideways day today… in anticipation that she forms a falling three bullish continuation pattern.

With trend line analysis you can easily get caught up with drawing so many lines that you find it extremely difficult to even see where price is!!

The best trend lines are those that are drawn from OBVIOUS peaks and troughs… and I label “obvious” as peaks and troughs that you can see from standing at the opposite end of the room.

Whenever I see a chart that was once extremely bullish and then see that it throw up a bearish reversal candlestick pattern I raise my right finger, bend my elbow and bring my right finger to my chin and moan…

Hmmm.

The first thing I ask is: why?

And I begin by looking at the announcements that were released during the day. Yesterday the announcements that were all released were negative for the USD… Retail Sales came out worse than expected, Core PPI & PPI came out worse than expected… so according to the fundamental side of things the USD should have weakened last night.

Then I’ll compare the USD against the other major currencies. Did the USD weaken?

Well the GBP hardly moved.
The CAD strengthened (but it had a positive announcement released).
The AUD started to strengthen but came back by the end of the day.
The EUR & CHF weakened.

So across the board I can’t state that the announcement really was a factor in the JPY strengthening… mainly because nothing else did (bar the CAD)!

I then move back to the charts to see if there was something I overlooked… and after drawing another channel I discovered that there possibly could have been a more technical reason for why the JPY strengthened.

(Click the chart below:)

As per my previous post, if the USDJPY does close below 109.07 today then I’d expect further downside for the USDJPY… and in the long run if this channel is one of the reasons why then we could see if drop further than 108.90!

Did we see the USDJPY vehemently oppose Monday’s breakout?? Did we see the USDJPY come screaming back?

No.

So what do we have?

We have a confirmed breakout, but a shaky one though.

The congestion formed yesterday was a famous bearish reversal candlestick formation known as a hanging man. This formation is considered MORE bearish if the close finishes lower than the open… which is what the USDJPY did.

So what do we do?

“Hanging Man” candlestick formations need confirmation, and confirmation will only be seen after today’s close. The confirmation needed is if today’s close ends up below yesterday’s low (being our perfect 50% retracement zone of 109.07)… if this happens we have confirmation that the USDJPY is likely to reverse… and possibly go back to the base of the breakout at 108.90.

What it does when it hits 108.90 (if it does indeed break south) will likely give us an indication of whether the USDJPY will go back up.

Therefore at this point in time I’m probably more inclined to exit my open USDJPY position and see what happens. If the USDJPY fails to close below 109.07 by the end of today I will try to find a re-entry into the currency and use 109.07 as an initial stop loss zone, or if the USDJPY does move below 109.07 I might try and snipe a few pips to 108.90.

Just thinking out aloud.