Japanese Prime Minister Shinzo Abe infamously talked of three arrows: fiscal stimulus, structural reforms and monetary easing. They were launched but now gravity has taken over and the arrows have fallen to earth.
Long-term analysis of the dollar/yen chart shows that dollar/yen moves within well-defined trading bands. The lower edge of the upper trading band is near 117. The fall below this level in February set an immediate downside target near 113. This was rapidly reached in a single down move and has been followed by weak consolidation. It's weak consolidation because the dollar/yen has consistently dipped below this level before clawing its way back to close above the level. This shows continued strong bearish pressure on the dollar/yen.
If this arrow had been fired from cliff top, then the arrow is bouncing on a small ledge on the edge of a precipice.
The fall from this ledge looks very dangerous. The initial downside target is near 109 but historically this is a weak level. During the dollar/yen rise this level offered little resistance. Historically, it's a minor point so there is a high probability it will not offer good support in the current fall.
The floor for the fall is set by the next well-defined trading band between 105 and the psychologically important 100 level. These level are a projection of the trading band width.
The well-established pattern of trading bands sets up the strategic trading pattern. It is bearish. This means that the trading market retreats as this is most likely to be a continuation of the falling trend towards 109 and 105. We use the ANTSSYS trade and analysis method to identify the opportunities as the falls develop. This is traded with a tight stop using a customized ATR indicator. The objective is to trade the resumption of the trend momentum towards 109.
As the dollar/yen approaches the 109 target level, all stops are tightened as it is unclear how quickly the market will react to the 109 support level before moving towards 105. Consolidation is anticipated, but the nature of the consolidation cannot be determined from the current price activity.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available fromwww.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe