Until late May, the yen was a one-way trade. You wanted to be short the currency… or safely on the sidelines. Yen buyers were simply run over. Any yen seller waiting for “better prices” got left behind.
Then, beginning May 23, the yen surged higher. It gained more than 9% in just 17 days. This left most traders pondering two questions: “Is the yen’s spiral over? Or, is this my chance to join the trend?”
It’s our chance to join the trend.
Boom & Bust subscribers should already be short the yen. I recommended a bearish yen position in July 2012. And despite the recent pullback, this position is still showing open gains of 40%.
Now it’s time to sell short the yen again… thanks to its recent strength.
Here’s a chart of USD/JPY. Remember, a weakening yen shows as an uptrend in this chart.
Between October 2012 and May 2013, the Relative Strength Index (RSI) crossed into overbought territory a dozen times. It spent nearly 40% of its trading days above 70. And, it dipped below 50 just once. These were confirming signs of the uptrend’s strength (i.e. the yen’s weakness).
The recent pullback has since worked off this overbought condition, sending RSI back down to 30.
It hasn’t been this low in a year.
While the pullback could extend lower, I’m watching closely for the ¥94 level to hold. I’ve marked this pivot level in the chart above (the red line).
The ¥94 level first acted as resistance in February this year. Then, after breaking above this level, it was retested on the downside… this time holding as a support level in late March (blue line). Now we’re trading at this level once again.
Plus, not only is ¥94 a level of prior resistance and support, it’s also the 38.2% Fibonacci retracement level (yellow line) of the October 2012 to May 2013 uptrend.
This retracement level often supports mild pullbacks and can be a great place to enter, or re-enter, positions in the direction of the prevailing trend. In this case, that means getting short the yen…
One way of expressing this trade is simply to buy the spot forex pair, USD/JPY, which is trading just above ¥94.50 today. The risk-to-reward ratio of a long USD/JPY trade is favorable at this point.
Stop-order placement could be based on the last significant low, which was ¥92.50, made in April. This represents a potential loss of roughly 200 pips.
On the upside, ¥100 would be the first profit target to watch for. This is about 550 pips overhead, giving us nearly a three-to-one risk-to-reward ratio.