Japanese Economy Showing No Signs of Sustainable Strength

December 7, 2012

Market:    USD/JPY - Forex

Buy or Sell:    Buy

Range:        Current Price

Chart:    Monthly chart of the USD/JPY with Stochastics set at 12-3-3




Above is a monthly chart of the US Dollar against the Japanese Yen. For the last 25 months this cross has been forming a very strong bottom within a 900 pip range between 75.50 and 84.25. In February this year it broke the five year downtrend without any Bank of Japan (BOJ) intervention; a very strong sign of a turnaround.

Fundamentally this cross has a lot of positive news. There is a potential political shakeup in the works for Mid-December. The BOJ is under pressure to lower rates further; yes to negative. And, the Japanese economy continues to show no signs of sustainable strength. Any and all of these potential events could cause the Yen to drop significantly. Additionally, once the US fiscal cliff is resolved the Dollar will enjoy renewed upward strength. All of these fundamental events will happen within the next four weeks.

Technically the above chart says it all as the cross is bottoming out and is poised to start a new multi-year uptrend. Initially the Dollar should rally to just above the top of the range, around 84.50. Then it could fall back slightly before making a stronger thrust higher pushing above powerful resistance at around 86.00.

For the aggressive trader a position could be bought at anytime with a stop just under 81.00 and a profit order of 86.00. For the more conservative investor you could wait for a pull back to less than 81.50 with a stop just below 81.00 and a profit order of 84.00. In either scenario the potential risk reward is very reasonable.

By Tim LuCarelli