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Chart: Here’s why the dollar could weaken against the yen

Tomohiro Ohsumi | Bloomberg | Getty Images

Back in May, we set a downside target for the dollar/yen at 100. That target has been achieved despite the optimism from Prime Minister Shinzo Abe.

The way in which that target was achieved provides some guidance to what may develop next. There are two dominant chart features on the dollar/yen chart and they define the potential future price action.

The first feature is the powerful down sloping trend channel. From February 2016, the lower edge of the channel has provided a strong support feature. The upper edge of the channel provided a resistance level.

This pattern suggests that dollar/yen has a high probability of reacting away from resistance currently near 103 and retesting the lower edge of the trading channel, currently near 95. That's a particularly bearish outlook. It's theoretical and needs to be verified against previous price activity.

It's also important to note that a breakout above the upper edge of the trend channel signals a change in the direction of the trend. This change may include a consolidation sideways movement, or the beginning of a new trend. However, this is currently a lower probability outcome.

The second dominant feature on the dollar/yen chart is the support band between 97 and 101. This support band is a significance barrier to a continuation of the downtrend. Currently, the dollar/yen is hovering around the upper edge of the trading band near 101. The influence of the upper edge of the trading channel suggests there is a higher probability the dollar/yen will fall below 101 and continue to test support near 97.

Which is more powerful – the trading channel or the trade band? Chart history suggests the trading band support at 97 is more powerful than the lower trading channel target near 95. The 97 level has acted historically as a support level so there's a high probability it will provide support again.

The 95 level hangs in mid-air. It has not acted as a support or resistance level in the past so there is a low probability that it will act as a support level in the future.

The combination of the trade channel and the trade band is bearish. But the combination of these chart patterns also suggest that the downside target for the dollar yen is at 97. Traders will watch for consolidation to develop between 97 and 101 prior to any change in the direction of the trend.

Daryl Guppy is a trader and author of The 36 Strategies of the Chinese for Financial Traders, available at www.guppytraders.com. He is a regular guest on CNBC's "Squawk Box" and a speaker at trading conferences in Asia, Australia and Europe.

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