Trading yen? You need to look for this

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Fresh stimulus from the Bank of Japan (BOJ) boosted the dollar-yen in the final quarter of 2014, but as upward momentum wanes, charts suggest a critical test is at hand.

The dollar-yen briefly rose above 121 in December after the BOJ expanded its stimulus program at the end of October. Coupled with forecasts for a Federal Reserve rate hike mid-year, many investors expected the dollar-yen would continue to rise. But uncertainty about the BOJ's ability to achieve its growth and inflation targets has undercut that momentum. Now, the dollar-yen is testing support.

Seen on a weekly chart, the dollar-yen uptrend moves between well-defined trading bands. The breakout above 109 in November 2014 had a trading band target near 113. This was achieved and the width of the trading band was projected above 113 to set the new target near 117. Using the same calculation method the next upside target near 121, which was achieved in December 2014.

The behavior of this fast rally is defined by the pattern of trading band activity that has dominated the market since June 2013 and can be used to understand the pair's current behavior.

The dollar-yen has developed a down-sloping triangle. This is usually a bearish pattern. A close below 117 has a downside target near 113, calculated from the width of the trading band.

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The down-sloping triangle pattern on the dollar-yen is not always bearish, however. From January 2014 to June 2014 the dollar-yen developed a down-sloping triangle pattern. But this pattern moved sideways for five months using the lower edge of the trading band as a support level near 101 before breaking out above 105 in September 2014.

There is a reasonable probability that the dollar-yen will now move sideways from the current down-sloping triangle pattern and use 117 as a support level. In this situation the first upside target is a retest of resistance near 121.

The behavior of the dollar-yen chart is not fully developed, so it's not possible to decide how the down-sloping triangle pattern will develop. Traders will closely watch the behavior of the 117 support level. A close below 117 on a weekly chart would confirm the strength of the down-sloping triangle pattern, signaling the end of the uptrend.

If the dollar-yen develops a sideways consolidation pattern using 117 as a support level, traders will look for really and retreat behavior between 117 and resistance near 121. A breakout above 121 will signal the continuation of the longer-term up trend with the first target near 125. There is a greater probability that the dollar-yen will continue to move sideways between support near 117 and resistance near 121.

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