USDJPY

This is going to be one of those 'After the horse has bolted' type posts. The reason being that I prepared most of it last night, and I was going to discuss how the USDJPY has reached levels where I fear a correction may be due. However, the BOJ very unkindly and rather rudely failed to inform me that they were preparing intervention last night. Nonetheless, the analysis clearly still has value, and I feel it it still worth producing, since it may still be relevent in terms of subsequent price action from here.

Thus the pre-prepared part of today's blog goes as follows:


Yesterday the USDJPY broke to a 15 year low. The move lower in the USDJPY has been incessant, and whilst I do not wish to trade against it (yet) I think there may be a small risk of a turn not far from yesterday's lows. The principal rationale for this is the declining trendline from late 2009. This trendline has 3 prior points on it, which suggests that it should be taken seriously. The low yesterday @82.92 was just above the level where this line intercepts the current downtrend at around 82.80/90. - This can be seen on the chart below:

I also feel that the recent price action on the USDJPY is very similar to the price action which occurred just prior to the bottom on the EURUSD back in early June. I raised this point in yesterday's posting, and have reproduced the chart showing this below, with the chart of the EURUSD from May/June of this year showing price action just prior to the turn. The price action I refer to are the similar looking Descending Triangles, both of which have occurred in the wake of sustained and powerful downtrends.

The next piece of evidence is something which I deem slightly suspect, but nonetheless I would like to present anyway as I fear it does still raise a potential warning flag. - Before I present it, I just want to state the reason why I consider it as a touch suspect.-  I am using a comparison versus a previous example of price/momentum behaviour, however I have only been able to find one prior example where I have seen similar price/momentum behaviour. Thus having only one prior example of a specific set-up, it is at best highly speculative to suggests that the potential price action is likely to behave in the same way. However, I will counter this, by saying that the reason I consider this worthy of presenting, is that the behaviour of price and momentum together here is very much atypical, and therefore the comparisons should be at least presented and then watched.

I have presented the 2 comparisons below. The top chart shows daily price action late 2003 to early 2004, whilst the lower chart shows the current picture. - The principal point of the observation relates to the behaviour of the MACD indicator as the price falls.  - Notice how both MACD lines moves in an almost horizontal intertwined fashion whilst the price falls continually within two converging trendlines which formed a wedge shape. In the earlier example (top chart), this price decline continued until a very sharp correction thrust the price out above the upper trendline, leading to a very sharp move retracing the entire price decline which had occurred since the start of this wedge. As I stated above, just because this type of price action occurred once previously, it does not guarantee a repeat, however if I were to speculate, then I would say a repeat may be a possibility. Should a sharp correction occur which breaks above the upper declining wedge line, then this could see a very sharp move to fully retrace much of move from the start of the recent wedge, which began in Q2, in as little time as just 2 - 3 weeks.

That is as far as I had got with last nights pre-prepared posting on the USDJPY.  I had some further detail, I was going to add, which included some divergent price action I am seeing on some of the other JPY crosses and the Risk markets, however I think things have moved on now, and I would merely be labouring the point if I were to present them now.

As I write this, the USDJPY now stands from at 85.47, up nearly fully 250 ticks from last nights levels. The chart below shows last night's BOJ intervention move. If this were to follow through, as per the above example, then this suggests a possibility of a strong move higher.  Three retracement levels jump out at me as I look at the chart:
1) 88.15 is the high from late July from where this almost continual downmove began, it also happens to be a low point from early March, and is just above the key 38.2% correction level.
2) 92.12 is the 76.4% Fib correction of the entire move and is close to the early June highs from 93.00.
3) 95.00 which is the high point of the entire wedge, and was the pre-Flash Crash high. An eventual move to here would certainly be a possibility.

The tough question is, if I decide I do want to go long, where should I buy? - I could just buy here, the risk is that the move terminates and the USDJPY crashes should the BOJ fail to follow through with further action, this is a risk. On the other hand if I hesitate, I could miss a large move, the USDJPY may not retrace at all, and I am left wishing I had been more proactive. -- My thinking currently is that some sort of correction may occur in the next 24/48 hours, which could see a test of the breakout level, which was around 84.50, which is just above Friday's/Monday's highs. In the meantime, one can not rule out a move to around 86.00 before this very short-term move starts to get exhaustive. If a move to 86+ occurs I doubt this would retrace much below 85.00, if at all. - I shall watch and wait for now (Patience can be a virtue, - it can also be a pain in the Butt) .

US 10 YEAR YIELD with MACD - Looking for clues.

I have been of the opinion that the US 10 year yield is heading towards around 2.20% and possibly lower for some time now. It is a topic I have covered several times in the past few months. However, a look at the MACD momentum picture, has got my attention. The yield has moved sharply lower over the past few weeks, however, the MACD has been if anything moving sideways to slightly higher. This is classic 'Bullish Divergence' [ Bullish Divergence = Lower lows in price and higher lows in the MACD], divergences between the MACD and price can prove to be very effective in identifying potential reversal in price movement. The chart below shows the current situation, with the divergence clearly highlighted. - I have looked back along the US 10 year for examples of previous price action of a similar nature.  The second and third charts below show 2 previous periods of similar behaviour from 1992 and 1995. In the 1992 incidence a sharp correction took hold pretty quickly, whilst in the 1995 incidence the yield went through a meandering bottoming process involving some minor new lows, before a sharp correction took hold. I would say that of the two, the 1995 comparison probably bears a greater similarity to the current price action.

I will however qualify the above:
    - My first qualification is that I believe momentum is always a secondary indicator, whereas price movement and trend take priority, and currently this continues to head sharply
lower. However a potential warning flag should be raised. -
    - My second qualification is by posting a chart (See Top Chart below) which completely contradicts everything I have been saying above. It is a chart of the Japanese 10 year yield from 1999 - 2001.  I have highlighted a period where a similar MACD and yield divergence took place. However, in this instance the MACD divergence failed to lead to a reversal and the downward movement in yield actually accelerated (This also shows my point above regarding price trend taking priority over momentum). - What is also a little scary is that the period from 1999 to 2001 on the Japanese Yield chart bears an uncanny resemblance to the period on the US 10 Year Yield chart from late 2008 to the present. 
    - My third qualification comes from looking at the Weekly chart with MACD (See Bottom Chart below). On the two previous occurances of daily Bullish MACD divergence, highlighted above (1992 and 1995), the weekly Yield and MACD were also Bullishly diverging, however this is clearly not the case on the current weekly chart, where MACD continues to head lower with price.

In summary the situation is thus; the MACD indicator is posting a possible warning sign that a reversal or correction may be due, however the indicator can occasionally give a false signal, in those cases the price or yield will fall to a significant new low, this may be one of those occasions.

Posting contradictory analysis is perhaps not to helpful on the face of it, however I think it important to present arguments for and against. Knowing both sides I believe makes analysis of the market and final decision making more robust. My preferred analysis, is that US 10 year yield will continue to head lower, though a sharp correction is possible. A failure to post a sharp correction, or a correction cut short, could however see  yields not only head lower, but could see a move towards a collapse type situation. We live in  interesting times.