A Look at the Recent Strength in the Japanese Yen

Jan 13, 2009: 11:24 AM CST

The Japanese Yen Index ($XJY) has been rallying quite sharply in the last few sessions, which might be of interest to you from a cross-market relationship point of view.  Let’s look at the daily and 15-min chart of the Yen Index.

Japanese Yen Index ($XJY) Daily:

If you look at a longer timeframe, the Yen Index has been rallying since 1998, with intermediate (higher) bottoms in 2002 and 2007.  Structurally, this rally shown here is a “Measured Move” projection from a large bull-fiag that is completing on the monthly chart (the target of roughly $112 has been achieved).  We could see a possible reversal from this level.

Price broke back above major confluence resistance in September, held a test of the three moving averages, and broke strongly into a new rally.  During this time, any pullback to the rising 20 EMA was a good, low-risk buying opportunity which continued until the average was broken in January 2009, though price found support at the rising 50.

The current pattern is frequently how reversals can set-up, as price first breaks support at a shorter EMA then finds support at a longer EMA before breaking it – watch to see if this pattern unfolds in the Yen.

In addition, we have a negative momentum divergence that is persisting, though in strongly trending environments, it’s often best to discount the value of oscillators in general.

Now, let’s focus in on the 15-min chart to see the stellar move that has just occurred since January 09 began.

Japanese Yen Index ($XJY) Intraday:

This chart is more for me to discuss pattern recognition in a strong trend, rather than discuss the profundity of a rising Yen and what that might mean across other markets.

I did want to highlight price structure in a strongly rising trend from birth to possible end.  We see a bottom on January 6th as price tested and held the daily 50 EMA and price burst into a sharp rally that took the index from $105.50 to $112 in a matter of days.

I highlighted the ‘spot of highest probability’ or “sweet spot” that allowed you to play with greatest odds and reward potential the zone of reversal – which was after the EMAs crossed ‘bullishly’ and price came down to test support at the confluence point of the 20 and 50 EMA (the first ‘test’).  This was the lowest risk, highest probability zone, as your stop would be slightly beneath this level and you would hold the trade as long as you could, or until we broke beneath the 20 or 50 EMA, depending on your trading style and risk tolerance.

Again, notice the multiple divergences that set-up as price continued to make new highs.  Divergences can warn of trend reversals, but more divergences occur that do *not* precede reversals than those that do – particularly in strongly trending environments.  Also, divergences are only ‘good’ for a pullback to the 20 EMA in most cases.

Continue to study the structure of the Yen Index for additional clues, and in addition, what implications it might have on the other markets.

Adam Hewison and staff at the Market Club frequently provide informative commentary and offer proprietary trade signals specifically in FOREX and other markets.  Check them out for additional information.

Corey Rosenbloom
Afraid to Trade.com

4 Comments

4 Responses to “A Look at the Recent Strength in the Japanese Yen”

  1. Anonymous Says:

    What does a filled black candle mean and what is it’s significance? Thanks

  2. Corey Rosenbloom Says:

    StockCharts is a little unique with their colored volume bars.

    A day is colored black when today’s close is higher than yesterday’s close.

    A day is colored red when today’s close is less than yesterday’s close.

    A day is ‘hollow’ (empty) when the close is higher than today’s open.

    A day is ‘filled’ (colored) when the close is lower than today’s open.

    Normally, you get red filled candles where the market closed both beneath today’s open and yesterday’s close.

    However, you get a black candle when today’s close was beneath today’s open (a down day) BUT the price gapped up so that today’s close is actually higher than yesterday’s close.

    Hope that wasn’t too confusing.

  3. Josh Fielden Says:

    Corey, could you please explain the difference between a simple moving average and an EMA and what is the exponent ? Why do you use a 50 and a 20 EMA and not some other ? (Presumably 10 and 4 weeks of trading days.)
    It’s probably very basic stuff……!
    What is the magic about those numbers ?
    In you charts they seem to work well but do they always do so ?

  4. Corey Rosenbloom Says:

    Josh,

    I did a quick post and provide links in the post “Simple vs Exponential MAs” that you’d find beneficial.

    Those are the combos that work for me. You have to do a cost/benefit analysis of what numbers work more than not, and all values will have their strengths and weaknesses.

    It comes down to this: The shorter the average, the more signals (more times tested) but the less valid each signal is. The longer the average, the fewer times it’s tested, but the more valid the signal is. I use 3 as a means to compromise.

    There’s no magic. Just a compromise that works for me.

    In my 2 years of blogging, I’ve never showed any other MA combo other than the 20 EMA, 50 EMA, and 200 SMA (perhaps with the exception of a few posts for example’s sake). They work better than any combination for my needs than the rest, but again, these are the compromises I’ve made – not saying they work all the time or that they’re the best choice for you.

    It took me a good 2 or 3 years of playing around and who’s to say that I’ll always use these combinations? Bottom line, if it works for you, use it and if it doesn’t, there are other combos that may be working better (but that goes for any indicator).