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A Yen for the Dollar

Monday, 30 Mar 2009 | 11:43 PM ET

The yen/dollar currency pair developed a significant change in trend in February, bouncing away from spike lows near 87. Is this a flash in the wok or part of a longer term sustainable trend?

Four technical factors have combined to define the yen trend.

The first is resistance. The second is an old fashioned trend line. The third is the up-sloping triangle pattern. The fourth is the Guppy Multiple Moving Averages (GMMA) display and its relationships.

Price activity takes the analyst closest to the true price and trend action. Strong resistance has developed near 99. This level provided temporary support in March/April 2008. Long term historical support and resistance is near 102. This suggests the current resistance is comparatively weak.

Trend lines can be tricky. Sometimes they can be placed very accurately and used as an exact definition of the trend. The uptrend line on this chart uses the tails of the candles in January/February to set the position of the line.

When this is projected forward, it captures the March dip away from the resistance level. The objective in this trend line is not to define the trend, but to define the development of upwards pressure. The dip and rebound activity shows trend strength and this in turn indicates developing breakout pressure. A close below this trend line shows trend failure and a retest of support near 90.

When resistance meets a rising trend line there is the possibility of a up sloping triangle pattern. These patterns capture the changing emotions of crowd behavior. The resistance level shows a static measurement of price and value. The sloping trend line shows a dynamically changing measurement of price and value.

A perfectly formed triangle has a high level of reliability. A less perfectly formed pattern has a lower level of reliability. The up sloping triangle in the yen/dollar chart is less then perfect, but when it is combined with other features it confirms developing upward pressure.

Triangles provide a method to calculate a measured move, or a price target. The base of the triangle pattern is measured and this value is projected upwards to give a potential breakout target. The base of a triangle develops over one to eight days of price activity moving in the same direction. This combination is met at point A when price drops from resistance and rebounds from the trend line. This value is projected upwards to give an upside target of 103.50.

The triangle pattern is completed with further retreats and rebounds from the trend line. Traders will look for behavior consistent with the trend line support and remain alert for the volatility spikes which have characterized currency markets.

Price behavior shows volatility and, in certain circumstances, crowd psychology. The GMMA indicator helps understand the reactions of short-term traders and long-term investors. Short-term traders do not want to get caught on the wrong side of the trend so they are very sensitive to changes in perception. Investors, shown by the long-term red group of moving averages are less skittish. Investor reaction to selloffs tells us if they are buyers or sellers.

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The sell-off at point A did not develop a significant compression in the long term GMMA. This suggests investors used this as an opportunity to accumulate or add to long positions because they believe the trend direction is up.

The developing strength of investor support, shown by the steady separation in the long-term GMMA, puts the floor under the trend and the breakout pressure. It increases the probability the yen will move above current resistance at 99 and achieve breakout targets between 102 and 103.

It's a bit more than a yen for a dollar and it reflects an interesting change in attitude towards the greenback.


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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