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Yen to Strengthen to 73 Against Dollar: Charts

A funny thing happened in the currency markets after the S&P downgrade of the U.S. rating – nothing. When the downgrade was announced currency markets braced for explosive action but markets delivered a prolonged anti-climax with a continuation of previous trend activity. The absence of action is just as important as the development of a stronger reaction.

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President Obama and Treasury Secretary Geithner have put a positive spin on this lack of reaction suggesting there is no alternative to U.S. Treasurys and that the U.S. will always be a triple A country while launching what some are calling punitive investigations into Standard and Poor’s.

The currency chart activity for Europe suggests people are still holding their breath whilst leaving open the option of some rapid changes in direction. The Euro-US weekly chart shows an equilateral or symmetrical triangle pattern. This is a broad pattern that does not have a well-defined base so it’s unwise to apply the price projection targets.

However, the pattern highlights the indecision in the market. An upside breakout has a first resistance target near $1.49. A downside breakout has the first support target near $1.36. This is a market for the fleet footed.

The chart activity in Asia is different with government intervention. The weekly Dollar-Yen chart shows a clear direction. Despite a sideways drift above the long-term downtrend line, the price is again falling towards the downtrend line, using it as a sliding support level.

Well-established support near 80 yen has been broken. The yen trades in broad trading ranges and the width of these ranges is used to set the upside and downside targets. Failure of support near 80 yen has a downside target near 73 yen. Persistent Government intervention can slow the progress towards this target but it may not be enough to prevent this target being achieved. Unlike the European crosses, this Yen cross shows a clear direction and target objective.

This contradiction of behavior is also seen in the physical currency substitutes, gold and silver. Gold was the immediate beneficiary of the S&P downgrade, quickly soaring to $1,815. This was a little above the long-term uptrend line which is acting as a resistance level.

This was a parabolic trend and traders have been preparing for the pullback collapse potentially towards the $1,640 area. We use a specific type of parabolic trend analysisand it has defined consequences, which provide long side and short side trading opportunities.

Silver has been the place to be, outperforming gold by around three to one – until it was pole axed by S&P. We stepped into the silver trade, anticipating a retest of $50. Instead silver melted, barely reaching $42 before retreating below $40.

Forex and precious metal markets are a tale of two cities. Both react to the same event and both show wide divergences of behavior. There is no single strategic technical analysis of these related markets. Traders must rely in on currency pair specific and metal specific analysis to develop the best trading plans. The danger lies in the way markets often replace indecision with a rapid snap in a new direction.

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.

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