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Crouching Yen, Hidden Dollar

The yen has surged to an eight-year high against the U.S. dollar as the greenback takes a hit from expectations for aggressive Federal Reserve interest rate cuts to counter the widening credit crisis and the economy's fall towards a recession.

The yen's rise has hit Japanese shares, raised worries about the health of Japanese exporters and stirred speculation that authorities in Tokyo may resume intervening to block yen strength after having stayed out of the market for four years.

And Charting Asia thinks this is the perfect time to take a look at the dollar/yen trend.

The support and resistance character of the dollar/yen (USD/JPY) chart provides reliable potential pivot points for a trend. As the price approaches a known support level, traders can position themselves in anticipation of a change in the trend.

In an uptrend, such as that in May 2005, a move above the resistance level at 109.00 was a clear signal of up trend continuation. More recently, in the context of the downtrend, the move below 109.00 is a clear signal of downtrend continuation.

This framework allows traders to set accurate trigger points and downside, or upside targets. We start with the monthly chart to identify the strategic resistance and support framework. Then we move into a smaller time frame to look for validation of the monthly chart analysis.

guppy doll yen march 11 A.jpg

The support level at 101.50 defines the low rebound point in November and December 1999, and January 2000. It fills this support rebound role again in 2005 January. This suggests two significant analysis points. The first is the rebound potential. This is a strong support level, so a period of consolidation near this level is a high probability outcome. A rebound from this level has a trading band resistance target at 109.00.

The second analysis point has a different outcome. A fall below the support level at 101.50 has a downside target near 96.00. This was a significant support and resistance level in 1994 July through to 1995 March. World market conditions have changed substantially since 1994, but the market has a well developed habit of respecting, but not necessarily repeating, history. A sustained move below 101.50 has a downside target near 96.00.

The support and resistance analysis provides targets, but it does not provide direction analysis. USD/JPY shows strong trending behavior within the trading bands.

The fall from the high at 123.66 has found support at each trading band level, but it has also developed a multi-level trend. It is easily defined with the trend line. This is a simple, but particularly effective analysis tool. It cannot be applied to all charts, but when it is applied to compatible charts it provides an effective analysis method.

The downtrend trend line acts as a resistance level, capping rises. Rallies react away from the trend line. An immediate strong rally from 101.50 is currently capped by trend line resistance near 109.00. The cap drops to near 107.00, and then to 105.00 over the next eight weeks. Monthly charts are used to provide a broad perspective. We shift to the daily chart to develop a more detailed perspective.

The key feature in the change of time frame is the validation of a longer-term strategic analysis. The daily chart shows resistance at 114.00 and again at 108.50 rather than the 109.00 suggested on the monthly chart. The current value of the downtrend line is more correctly placed at 109.50. A weak support consolidation level developed at 105.70.

guppy doll yen march 11 B.jpg

The strategic analysis from the monthly chart is validated, but the short-term trading tactics are based on more accurate price levels. A rebound from 101.50 will encounter consolidation resistance near 105.70 to 107.00.

The next significant resistance level is at 108.00. The trend and resistance level between 109.00 and 109.50 establish a significant barrier to any new uptrend development.

Combining the daily chart and monthly chart analysis suggests traders can anticipate rally rebound behavior to develop as the 101.50 support level is tested.

This rally rebound is capped by multiple resistance features, including the dominant downtrend line with a current value of 109.50. Failure of support at 101.50 sets a downside target near 96.00.

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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