Busted Head and Shoulders and Levels to Watch on Japanese Yen

Feb 26, 2010: 11:37 AM CST

Even if you don’t trade or look at the Japanese Yen Index charts, the Yen Index formed an interested “busted” (so far) head and shoulders pattern on its daily chart that is worth an educational look.

Beyond that, let’s look at the key levels to watch for an upside or downside break of current trendline boundaries.

Starting with the October 2009 highs, we see a likely “Left Shoulder” forming at the 113 level which then led to a bounce off the 109 support into the “Head” at 116.

From there, we had a slight “bear trap” on a quick break of the 109 level as price broke back inside the range, formed a “Right Shoulder” back at 113 in early February 2010, and then set-up a potential breaking of the neckline at the 109 level, which would have triggered a “Head and Shoulders” reversal trade entry.

A successful break under 109 would have triggered a likely downside target of a retest of 102 (which was both the price projection target of the Head and Shoulders pattern and a prior swing low from August).

… but that didn’t happen!

Instead, price bounced solidly recently off the 109 trendline support, rising the last six days in the row in a classic “Failed Pattern” rally (when those who tried to short-sell a head and shoulders pattern – or were short for other reasons – were forced to cover as buyers drove price higher).

That’s where we are now… we’re back to the 113 trendline resistance level.

This is a key area to watch, because a break of the 113 resistance level would be expected to create a likely burst to retest the 116 high.

However, if sellers step up and the Yen declines in value relative to other currencies, we could expect a retest at least of 109 and then a move back to 107 at least… and lower if 107 fails to hold as support.

The main lesson is that patterns – while very helpful in setting up risk/reward relationships – are never absolute (meaning, a Head and Shoulders pattern you see is never ‘required’ to meet its targets).

Second, patterns that fail can often produce a larger than expected ‘counter’ move in the opposite direction than expected.

Traders looking to play off potential opportunities in the Japanese Yen Index can use the CurrencyShares ETF FXY.

Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter:  http://twitter.com/afraidtotrade

3 Comments

3 Responses to “Busted Head and Shoulders and Levels to Watch on Japanese Yen”

  1. Mohammad Ashraf, CMT Says:

    Super, what's your take of Yen after looking at both current CAD and AUD movement?

  2. a4ashu Says:

    Hey corey, good thesis the levels are now at 110 (107-113 50% fibo level) probably test the 109 and 107 levels u suggested…. lets c how it plays out…

  3. a4ashu Says:

    Hey corey, good thesis the levels are now at 110 (107-113 50% fibo level) probably test the 109 and 107 levels u suggested…. lets c how it plays out…