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Japanese Yen May Be Easiest of Upcoming Currency Trades


The yen is setting up for a move.

Successful trading doesn't require that you know where the market will go. It depends a great deal more on recognizing high-probability set-ups, where entries are optimal and the risk of loss is well-defined (and hopefully small). That's why the current picture of the US dollar/yen market is such a gift. The consolidation pattern that has lasted through the spring and summer appears nearly complete, and the currency pair is poised to break out in what should be a strong move. There's also a clear line to indicate where the trade would be wrong, thus defining the risk.

Beginning just a few days after the October 2011 high in the yen (NYSEARCA:YCL) (NYSEARCA:YCS), our firm charted and traded its progress downward. The monthly chart below shows how the powerful downward wave of 2012-2013 halted when it first found support at the edge of the channel. That also coincided with the beginning of upward cyclical pressure. After it found support, the yen moved into what appears to be a triangle pattern, which typically (but not always) breaks in favor of the continuation trade. The next phase in the 11-month cycle also favors continued downward movement.

The triangle is easier to see on the weekly chart. If it is going to behave as an Elliott Wave triangle and break downward, then the current advance labeled as wave 'e' cannot exceed the previous high labeled as wave 'c.' This chart is an excellent example of why triangle trades can present the best opportunities for optimal entry and placement of stops.

Note also that the commodity channel index at the bottom of the weekly chart is testing the zero line from below. The indicator is confirming the present area as a decision point. If the indicator were to pull away from the zero line, it would support the bearish continuation scenario.

Initial targets lower would include 0.009575 and 0.009082. For a close-up view of the possible ending wave of the triangle, its retrace levels, and lines of resistance, we will post updated charts of daily bars on our website.

This article originally appeared on Trading on the Mark.
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