The Japanese yen has been back in favor in recent months, as continuing worries over the outlook of the global economy boosted demand for the currency.
The yen is hovering at an eight-week high against the dollar, and trading at its strongest level against the euro since 2001.
But a look at the performance charts suggest it may be time to pick up the dollar-yen trade, which is showing a very strong support level between 87 and 88 yen.
The most important feature of the chart is the development of the fan trend line pattern. This is a long term reversal pattern. The fan trend pattern starts with a series of trend lines and a single support level, in this case, the 87-88 yen level.
The fan trend lines have a common starting point. The first trend line acts as a resistance level. The market hits this level and retreats. The market slides down this line until it encounters the support band. The rebound from this level moves above trend line A.
Now trend line A changes its character and acts as a support level. The market slides down the trend line A until it encounters support again. The retreat is also defined by a new trend line B which acts as a resistance level. The breakout above this resistance level signals a change in the role of trend line B. It now acts as a support line and the market continues to slide down again towards support. The peaks of this rally develop a new resistance trend line C.
This suggests that the yen can fall towards 88 again before developing a rally rebound that moves above trend line C. This rally will develop new peaks, possibly around the 97 yen level before again sliding down trend line C and using this as a support line. The peak at 97 will act as an anchor point for fan trend line D. The breakout above trend line D has a high probability of developing into a successful long term change of trend.
The fan trend line pattern usually includes 4 to 6 fan trend lines. The breakout development takes place over 3 to 8 months. The most important feature is that the final successful breakout is sustainable and sets a new long term uptrend. There is no rush for this breakout development and traders will look for short term rally and retreat behaviour between the fan trend lines. The key feature will be the consistency of support between 87 and 88.
The same, however, cannot be said for the euro-yen trade. The defining feature in the monthly euro-yen chart is the failure of long term support near 113 yen.
This relationships is best seen on the monthly chart. Starting from October 2008, this has developed a double bottom pattern with a rebound to 138 in June 2009 and a retest of support in May 2010.
The failure of support at 113 on May shows continuing downside pressure. The technical downside target is calculated by measuring the height of the June 2009 rebound.
This value is projected downwards to give a technical target near 90 which is equal to the October 2000 lows.
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 CNBCAsia 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.
CNBC assumes no responsibility for any losses, damages or liability whatsoever suffered or incurred by any person, resulting from or attributable to the use of the information published on this site. User is using this information at his/her sole risk.