Over the past few months I’ve been focusing a lot of my attention on the Japanese Yen. As an American investor who trades U.S. stocks (among other asset classes), I think it would be irresponsible of me to ignore a currency with such a high negative correlation with the S&P500. I’ve been pounding the table lately about how obnoxiously high the negative correlation currently is between Yen and U.S. stocks and I still think it’s extremely important that we pay attention.
This is, in my opinion, is the most important chart in the world if you have any exposure at all to U.S. stocks. We’re looking at a weekly candlestick chart of Japanese Yen Futures going back a decade. What had served as support over the past 12 years, particularly at the 2007 lows (U.S. stock market top), briefly broke down earlier this year, only to quickly recover. The old saying is that, “From Failed Moves Come Fast Moves In The Opposite Direction”. I therefore think this is a prime candidate for an epic rally:
Only price pays, I cannot emphasize that enough. But in addition to price action, we have some indicators that we like to use strictly as a supplement. These indicators are to either add or decrease conviction. First of all, we are close to 20% away from a 200 week moving average, which is very stretched. This alone is not a reason to buy Yen, or anything else for that matter, but it does indicate to us that if we do get a snap back, it’s got a long way to go to mean revert. This simply puts the risk vs reward proposition in favor of the bulls.
In addition, if we take a look at momentum, the 14-week Relative Strength Index (RSI) put in a higher low at the end of 2014 and one more higher low this June as prices made their ultimate lows. With multiple bullish momentum divergences, it gives us more conviction on our bullish Yen thesis.
Finally, this is not just some random level where prices could potentially be bottoming out. The lows in June came right near the 261.8% Fibonacci extension of the 2013 consolidation, which was the most recent counter-trend rally within this multi-year downtrend.
From an execution perspective, I think a breakout above this month-long consolidation would confirm our thesis above. Below we are looking at a symmetrical triangle well-defined by two converging trendlines. A break above the upper of the two should do it and we only want to be long if prices are above that downtrend line. To me, that’s the cleanest way to take advantage of this. Although one can argue anticipating that breakout, I guess I’m personally just more conservative. I will say that there is no reason to be long Yen if prices are below that gray shaded area going back to support over the past year.
I think there could be a lot of upside here in Yen. I would keep a very close eye on this chart, whether trading futures, currencies, or even if you’re just in U.S. stocks, considering how they trade inverse to one another.
This is an important one guys….
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