Last week I talked about a potentially very lucrative turnaround in the Japanese yen.
JPY is looking very strong against the board, especially when you compare it to the very bearish prospects ahead for the U.S. dollar. I’m going to show you a USDJPY chart in just a moment.
But first let’s take a look at what the dollar did last week so you can see how the world’s most important currency is faring:
Following a dismal CPI (inflation) report last week, the dollar crashed in the direction of the long-term trend I first identified way back in early 2017. The bearish megaphone top pattern was confirmed a few weeks back with a close through the neckline.
The dollar clawed its way back above that temporarily, then closed below the neckline again. While there might be one or two more short-lived rallies from the current level, the dollar is headed down in the months to come.
I would place the longer term downside US dollar target somewhere near the bottom of the current chart, around 106 or 104. That’s a long drop from the 116 level where it is now.
Keeping that in mind, let’s take a look at the biggest of the Japanese yen pairs, the dollar against the yen (USDJPY).
Last week’s decline in USDJPY resulted in 15-month lows. In fact, this decline absolutely shattered the long term neckline for the descending triangle I’ve drawn for you.
As with the US Dollar Index, I believe it’s only a matter of time until we see much lower levels in this pair.
However, USDJPY is probably a bit oversold at current levels. Just like the Dollar Index bounced for a couple of weeks before plunging again, USDJPY is likely to follow the same general path.
But any rises are likely to be very short term. I see USDJPY trading at parity (100) or lower later this year.
If you’re looking to play the bounce from last week’s drop, USDJPY might very well get back to 108 or a similar price just above the neckline. After that, look out below!
My earlier analysis on JPY pairs proved to be very profitable in the grand-daddy of all JPY pairs: the British pound against the yen (GBPJPY).
We were short GBPJPY from 152.17 and were up as much as 305 pips before closing out the trade (for now). We’ll be getting back in soon, because I strongly believe we’re headed to first 147 and ultimately 140 in GBPJPY. For now I’m wary of a bounce and think there are better entry points ahead.
At the very least I expect GBPJPY to drop from 151 down to 140. That’s 1,100 pips or $11,000.
We might even see another 5,000 pip crash similar to 2016. That’s when GBPJPY crashed below the neckline of the head and shoulders and then plummeted for the next several months. A 5,000 pip move is worth $50,000 for every $1,000 traded.
So we’ll be circling back to GBPJPY soon enough.
Now for a new JPY trade to consider: the EURJPY (Euro against the yen) is also looking very tempting for a lucrative short
Note this is a daily chart, not a weekly as I’ve shown you earlier. So the timeframe is different even if the general idea is similar.
I’m keen on shorting EURJPY due to the inside-day bars where the price has flopped around within the high-low confines of the long blue bar a few days back. That the market failed to bounce from that bullish bar is an indicator things are headed south very soon.
A quick word on inside bars: in my analyses they represent a “coiling” of energy, just like a spring all wound up and ready to burst forth. When a market has previously moved a lot (with a long bar) and then receded into a series of inside bars that are contained with the long bar, this isn’t the market losing energy.
All the energy’s still there.
It’s just waiting to break out in another long bar or a whole series of them. And in the case of EURJPY right now, that energy’s a whole lot more likely to break out on the downside when you look at the megaphone top and the recent price decline.
So although the EURJPY price hasn’t broken the neckline of the megaphone top, I think that’s about to happen very soon.
The best way to play this is with a sell stop order. That lets you enter when the price begins moving in your favor and that “coiled spring” of energy gets released to the downside. You trade with the released momentum rather than against it.
Does that all make sense?
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