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Yen Headed for Another 10% Drop: Chartist

Does the Yen’s Pullback Take the Heat Off Bank of Japan?
Akio Kon | Bloomberg | Getty Images

The dollar-yen, which is trading at multi-year highs has spent several weeks consolidating near the 95 level. The breakout above 95 has an upside target near 102. Speaking on CNBC's "Asia Squawk Box" on December 21 as the dollar-yen moved above 84 we set the upside resistance target near 95.

In notes at the end of February we set the upside target near 102. The resistance behavior near 95 is significant because in the future this provides a floor for any market retreat. The rise of the yen is dragging the Nikkei index after it. Watching the dollar-yen gives early warning of Nikkei behavior.

(Read More: Yen's Safe-Haven Status Called Into Question)

This rapid rise from 79 to 95 had the short traders twitching their trigger fingers. They ended up shooting themselves in the foot. The rise was very rapid, but it was not unexpected from the technical chart perspective.

The dollar-yen breakout above 79 in October 2012 was part of a long term fan reversal pattern. This pattern started with the peak price of 110 in August 2008. We have spent five years with the yen well below parity, but this is not the usual condition for the yen. A return to parity or above is the long term position of the yen from 1996 to 2008.

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Resistance near 95 is well established. It acted as a support level in March and August 2009. It acted as a resistance level in April 2010. This has been a major feature of the market post-Global Financial Crisis. Now that this has been broken this suggests it will become a strong support level in 2013. When it was acting as a resistance level it meant the dollar-yen took several weeks of consolidation near this resistance prior to developing a breakout.

The current breakout has two upside targets. The first target is near 101. This was a major support level in December 1999 and again in November 2004. However, it offered no support in April 2008. This suggests that it will offer limited resistance for a breakout above 95.

The most powerful support-resistance level is near 102. This acted as support in June 1997, January 1999 and again in September 2005. It acted as a resistance level in January 2004 and June 2008. It was the peak high used for the start of the long term fan trend reversal pattern in August 2008.

(Read More: Will Asian Currencies Forever Disappoint? )

Parity is a strong probability, but it's only part of the story. When we step back and look at a monthly chart we see two features. First, as noted, is that the yen has spent a long time historically above parity. Second is that any breakout above 102 has an upside target near 111. It's a long stretch to set this as a target, but any sustained breakout above 102 has 111 as the next target. This acted as resistance in 1994, 2000 and 2004. It acted as support in 1997, 1998 and 2006.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com. He is a regular guest on CNBC Asia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.

If you would like Daryl to chart a specific stock, commodity or currency, please write to us at ChartingAsia@cnbc.com. We welcome all questions, comments and requests.

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