Yen seems poised for more punishment

Two weeks ago I posted the article, “Japan: the harbinger of bad things to come,” looking at the monetary shenanigans of BOJ’s monetary policy which has doomed Japan to stagflation with a potentially hyperinflationary finale. Today I wanted to turn readers’ attention to the technical analysis of yen’s exchange rate.

In spite of the BOJ’s $20 billion intervention to support the YEN/USD exchange, the rate has barely budged. As the markets digested the noise, the yen could be on the verge of crashing again. The YEN/USD price chart (the price of US dollar in Yen) suggests that we are at the precipice of another leg down for the yen (a rise in the price of USD):

Even for students of technical analysis (TA), the pattern I outlined above might not be a familiar one. I’ve never come across it in TA literature, so I’m not aware whether it has a name or not. However, I’ve been analyzing price charts for over 25 years and I’ve observed this pattern many, many times, both in bull and bear market scenarios.

Basically, you have a trend break-out, as we saw back in March, then a broadening sequence of rallies and corrections. Eventually, that sequence narrows around some ‘support’ or ‘resistance’ price. The last stage in the pattern is usually another breakout in the same direction as the previous one, and this breakout tends to be as strong as the initial one.

Now, even though I use TA, I tend to disbelieve any price targets. However, the pattern I outlined above has tended to be quite consistent. In this case, it would imply that the price of the US dollar in Yen will likely vault at least another 15 yen, to 160 over the coming weeks. We’ll find out soon enough.

It ain’t goat entrails nor tea leaves

When I posted articles like this in the past, I received a barrage of smug comments dismissing chart analysis as little more than superstition. However, I believe that technical analysis of price charts is not only legitimate, it is probably more reliable than studying market fundamentals. For example, last year I posted a short video predicting Bitcoin’s crash and its subsequent recovery, also based on nothing more than the technical analysis of Bitcoin’s price chart. I’m posting it below because in it, I also briefly address the “mindset barrier” market fundamentalists have vis-a-vis technical analysis:

TA is neither a crystal ball nor magic and you’ll get it wrong many times – probably close to 50% of times. But unlike fundamentals, Technical Analysis makes it possible for traders to better gauge their speculative bets, anticipate large price moves and visualise the relevant support and/or resistance levels.

Today’s situation with yen definitely fits the bill: the price of USD is likely to rise by 15 yen or more, whereas a short-term price decline could be limited to about 4 yen (a stop-loss just below 140 yen/USd). At any rate, if you study price charts, you’ll begin to see patterns repeating again and again and with time and experience your judgment will improve and hopefully your trading will too. Otherwise you might sign up for our TrendCompass reports that generate such signals automatically and communicate them in a daily newsletter.

Alex Krainer – @NakedHedgie is the creator of I-System Trend Following and publisher of daily TrendCompass reports, probably the best CTA daily newsletter on the market today.