The Japanese yen has been in a long term down trend against the dollar since 2005 and after its recent rally the bears should take control again. This scenario will present a good risk reward trading opportunity as the currency starts to fall again.
The Japanese yen is a currency that simply does not look near a trend change and sticking with the major down trend is the way to go ? let?s take a look at it.
If we look at the daily chart, the resistance is clear - at last weeks spike to the upside at the 8300 level.
Prices have seen reduced volatility over the last couple of days and price momentum looks to have peaked.
So when will the bears take control?
The key is to watch short term price momentum.
Pull up the daily chart of the yen (a good free service is futuresource.com) and add the studies:
Relative Strength Index ( RSI), Stochastic and Bollinger Bands.
The former two studies indicate short term price momentum ? we don?t have enough space here to go into detail about how they work (simply check our other articles) but if you are not familiar with them you should be - there great timing indicators.
The RSI Has been rising and momentum is now waning it is presently just touching the 56 level (RSI on the yen has not been higher than 70 on the chart) and we don?t see it getting there this time and it seems to be trying to double top.
The RSI is losing strength and so to is the stochastic.
Stochastic momentum is waning.
We don?t yet have a signal of weakness ( watch for both lines to cross the downside with bearish divergence) but when this occurs and RSI falls to, the bears will get the nod.
Use the Bollinger band to indicate targets.
The first port of call will be the mid line and if momentum is weak when it approaches this level, look for a pop to the downside to test the bottom band.
If you are trading currencies, you can make big long term gains trading with the major trends and the yen is definetly one of those! There is no indication of a trend change just yet, so a good strategy is selling rallies.
Be cautious!
The yen is one of those currencies that can always make you look stupid and is very volatile, so don?t just enter and hope momentum wanes ? WAIT FOR CONFIRMATION.
The stochastic and RSI are a great combo for doing this.
They will help put the odds in your favour and help you in terms of long term profitability.
Over the next few days watch for the bears to take control again and the down trend to resume, but don?t jump in wait for momentum to weaken.
Good luck and good trading!
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