From the Desk of Ian Culley @IanCulley
Currency markets have provided stellar trading opportunities this year.
It isn’t always this way.
Last year was rough. False breakouts and whipsaws were the norm, as most forex pairs and crosses chopped sideways in trendless ranges.
Many of those consolidations have now resolved, as currency markets have begun to trend again. And it’s hard to find a stronger primary trend to bet against than the declining Japanese yen.
We’ve written about the yen multiple times in the past few months, pointing out that The Yen Provides the Base and joking that we could profit by simply buying Anything in Yen.
Today, we’ll follow up by outlining three tactical setups to bet on further yen weakness.
The three setups we highlight below are quite similar — all are carving out multi-month bases within the context of underlying uptrends. And we want to buy strength on the completion of these bases.
Wait a second – I thought we were getting short!
We are.
When we get long these forex crosses and pairs, we are effectively shorting the denominator — the yen. That’s worked well this year.
We expect more of the same if and when we get upside resolutions from these short-term consolidations.
Let’s dive in!
1. The USD/JPY
The face-ripping rally in the USD/JPY has slowed, but the uptrend is still very much intact.
Though it printed a three-peak bearish momentum divergence, the USD/JPY never reached oversold conditions. This is what the digestion of gains looks like within a strong uptrend.
Bullish momentum is now picking back up, and the USD/JPY is ready for another leg higher.
But we don’t want to jump the gun. If and when we get a break above 139.10, we want to get long with a target of 147, which just so happens to coincide with a key extension level and the 1998 highs. We can only remain long if we get a daily close above our risk level. It’s most likely a mess until we get a decisive breakout.
2. The AUD/JPY
This risk-on pair has taken a backseat to the USD/JPY. But it’s offering a precise level to define our risk and looks ready to break higher.
After a big base breakout earlier in the year, momentum has cooled as price has consolidated. The 14-day RSI has remained in a bullish regime, indicating the bulls remain in charge as they repeatedly challenge a key level of overhead supply.
These are all signs of a healthy uptrend.
We want to buy strength on a break above 95.80, with an initial target of 98.50 and a secondary target at the 2013 highs of 105.25. As always, we need a daily close above the breakout level before entering.
We have no business being long AUD/JPY below 95.80.
3. The CAD/JPY
The Canadian dollar has been one of the most resilient currencies against the USD, which makes it an ideal candidate against the yen. And it’s a great chart to boot!
The CAD/JPY has been on the move, expanding and contracting within a bullish momentum regime since last fall. It’s already up more than a thousand pips since March.
And after churning sideways for the past three months, it looks ready for a fresh leg higher.
We want to be buyers on a break above the June pivot highs near 107.25.
As long as it’s above those former highs, the risk is to the upside, and we’re targeting 111.50 with a secondary objective at the 2007 highs of 125.55.
The situation is clear: Currency markets are trending – and we want to take advantage of the current environment while it lasts.
There’s no better way to do this than by shorting the yen.
Stay tuned!
Thanks for reading.
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Allstarcharts Team