Swing trade idea in the currency pair

About a month ago, I outlined a swing scale trade plan for the currency pair of the US dollar to the Japanese Yen.

The idea was based first on technical charting premises, and secondarily on fundamental conditions.

Japan has been experiencing rapid inflation relative to the US dollar throughout 2016.  Technically speaking, this has caused the Yen to fall on a USD/JPY chart, through a range, that has been established throughout a 20 year period.

Here is a chart of that that I made a month ago.

USD JPY 20 yr range

Sometime the spring, Shinzō Abe announced he was going to suggest a massive “stimulus” package in a July meeting with the Bank of Japan.  Price on the pair went in to a holding pattern at the bottom of the range on this news.

The 80% rule

The idea of a range trade is based on a statistic that, whenever price goes outside of a range, then comes rapidly back in to the range, 80% of the time it will retrace the entire range, to the other side.  This happens no matter if the range is a 20 year long range, or 20 days, or even 20 minutes.  It is a fractal phenomenon, like all technical trading.

In terms of an auction, the rationale for this is that, the range is an area where the market has long established fair prices, value, and now we are on the lower end of that range.

If price goes lower, and holds lower, then the market has decided that this product should start to establish a new range of value, at a different level.  If price goes lower, but then rapidly re-enters the established range, then the market is saying that the established range is indeed fair, so that it would tend to re-auction the entire range, through a series of micro auctions, of ranges within the range.

Based on this thought process, we set up a trade plan, which looked like this.

USD JPY range trade

Fundamental vs technical trading

News/fundamentals vs technical charting are a sort of chicken and egg situation.

Viewing technials as the chicken, the chart is like a prognostication tool, a crystal ball, telling ahead of time that news will likely come out, about fundamental situations that will support a certain direction.

Of course, to fundamentalists, the chart seems to be the egg.  It seems to be lagging.  Like the nature nurture question, the truth seems obviously a mix.

Charts perhaps should be regarded like a chart for an ocean voyage.  Saying, if we go this way, these are the obstacles and currents we will face along the way.  This is more of a chart neutral attitude.  It doesn’t say which way the boat will go, just that, if it goes this way, then these are the conditions on that route.  And if it goes in the other direction, it’s moving in to open ocean, and will go a long way, before it hits another piece of land.

Back to the trade

Anyway, let’s see how this situation is playing out.  Prior to the bank of Japan meeting, price did bounce back in to range, in anticipation.  Abe’s recommendation was for a huge money printing program.  There was a “buy the rumor” action.  And it already hit one of our scales before the meeting.

USD JPY progress July 18 2016

Then we got a “sell the news” action, when the BOJ rejected Abe’s recommendations, and opted for much more modest measures.


The market reacted to the news like this.  It is still in range.

usd-jpy sell the news

The reason the range trade idea still potentially makes sense is that turn-arounds on this time frame can be messy.  A 61.8% level is very valid on large time frames.  The edges of a range on this scale are not sharply defined.  And there is still an important retest from November 2013 that has not been tested.

Let’s zoom in on that, looking for more precision entries and stops.

USD JPY breakout-retest

The idea of a retest, of a breakout from consolidation, is that this is the place where buyers showed up before, and sellers threw in the towel.  Whether you think that literally the same buyers show up, or the market recognizes this as a buy level, it often works.

Technically, the idea is backed up by being sandwiched between the large time frame 50-61.8% levels.  As a plan, this would be a neat buy point, because

  1. The risk is small relative to the reward. If buyers do step back in, and push it back in to the higher range, the 80% rule again triggers, and the target becomes $124, starting from $98.  You know that below $94 is wrong.  So the risk is a max $5, for a potential reward of $26.
  2. Due to the previous 2013 consolidation, price is unlikely to fall quickly through this level. It’s likely to do 1 of 2 things:
    1. Either bounce quickly back up in to the higher range, from the exact break-out level before, of $98, then stick briefly in the $100-102 level (This would be retracing the 2014 range) then continue up.
    2. Not bounce quickly, get stuck in the 2013 range. In this case, the bigger idea of retracing the higher range becomes a lower probability.  But if price behaves this way, a loss of even $5 is not likely, since really, for the higher hypothesis to work, we don’t really want it to replay the 2013 range.  We want it to bounce off the high volume node at $98.  If it gets below $98, the tendency would be to test the bottom of that range, which is $94.  But this would not likely happen quickly, since it’s a sticky area.  We could probably abandon the trade sooner, if it gets much below $98.

What fundamentals would support the bounce from $98 action, and take price back to $124?  One thing could be that the BOJ might change its mind.  Another thing could be that their modest stimulation is enough to reverse deflation, just not as quickly as Abe’s plan.  In that case, the down move could be an over-reaction by the market.

The other side of the equation of course is the USD.  The Fed is still talking like rate raises in 2016 are possible/probable.  This puts deflationary pressure on the Yen. But if the US Fed changes this approach for any reason (weakness in the US economy, increased stimulus in the Euro zone or GB, etc.), and moves to compensate, by lowering rates rather than raising them, let alone by further QE, forex markets would react sharply.

Since the dollar basket is calculated more than 50% by its strength relative to the Euro, Fed actions are likely to be based much more on EU actions than Japan.  So to make guesses about likely Fed actions based on currency balancing, a look at the EUR/USD chart, and speculation about EU vs US economy fundamentals, is warranted.


Get the latest posts delivered to your mailbox: