USDJPY—treacherous waters

Lots of chattering about how the Yen has reached a 15-year high against the USD with the spike down to 84.73. To say the sentiment is bearish would be the understatement of the day.

Looking at the monthly chart below one can see several things of interest. First, note the steady trend down from the Aug. '98 high of 147.63. Yep, it's a downtrend with consistent lower highs and lower lows. In fact, this has been generally true since the 1982 high of 277.65.

Second, note the wedge pattern we're currently trading within. There could be a rally as it bounces off this bottom line but the new low of 87.73 is lower than the prior low of 84.82 from Nov. '09. Below here there isn't a lot of support as I wrote August 3 and the low of 79.70 from Apr. '95 is a steep drop.

Third, and most interesting, is RSI behavior. You have positive divergence between price and the oscillator which is normally bullish. You can also go broke trading divergence by itself which is why you need at least one other confirming signal. With this kind of downtrend I'd prefer more than one if I was thinking of going long. The other thing to note about divergence is that it is often most useful within the context of the larger trend, i.e. positive divergence after a severe drop in an overall uptrend. Finally, the positive divergence on this pair extends down into the lower time frames—check out the three-hour chart. The other interesting thing is the "failure swing" in RSI which I've highlighted with the two arrows. According to Wells Wilder a failure swing (in a downtrend) is when the indicator drops below 30, rises, and then drops below 30 again but not as deeply as it did the first time. One has a buy signal when it exceeds the first higher point in the RSI. I've placed another red arrow where that appears. There are some other intriguing things about RSI as well as the price behavior but that's enough for now.

So where am I going with this? If you're not already short (and I'm not) the safest approach is to sell a rally. One could also risk small longs from this level but as I wrote earlier this month you want multiple confirming signals on shorter-term charts as well as an extremely tight stop. Anything below 84.50 is ludicrous at this point. If you are short I'd light up and take some profits and add to the position with a clear break below 84.50. But be careful—we're in treacherous waters here.

Here's the monthly chart:











© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.

My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.