How to Play the Weakening Yen And Strengthening Stock Market
Based on long-term historical price patterns setting up in the Japanese yen trading pairs, I believe the Japanese yen is weakening.
This means Japanese yen correlated trading pairs will start strengthening.
(If that sounds contradictory, remember that JPY is in the cross position for all its pairs, meaning that all JPY pairs are XXXJPY. This means that if JPY weakens then XXX will get stronger against it and therefore each JPY chart will begin rising.)
Let’s get started with a monthly chart of USDJPY (the US dollar versus the Japanese yen)
On this monthly chart, we see that all the way back in 2012 – 2013, USDJPY traced out a triple bottom. Once it thrust above that neckline, USDJPY began a long-term uptrend.
Since 2015, USDJPY has been trading sideways within a long-term symmetrical triangle. It’s begun to break out above the upper trendline as it reverses its history of lower highs.
The price action above the edge of the symmetrical triangle implies we have a long-term breakout.
Now there's always a chance this is a trap. Sometimes price escapes temporarily, everybody gets excited and then the market moves back where it came from.
However, if USDJPY make a new high above last week with incremental new highs above 112, that suggests we’re off to the races and a major paradigm shift in the yen pairs is truly underway.
Here’s USDJPY again at the weekly level:
There’s a perfectly formed descending triangle here, and price is breaking out on the upside.
Not only that, but USDJPY has been making higher lows and higher highs in a small channel. We could be in the early stages of a massive move higher.
To get on board, place a buy stop above the high of this week around 111.21.
Now here’s EURJPY (the Euro versus the Japanese yen):
Starting back in the October - April timeframe, EURJPY formed an important double bottom and
inverted head and shoulders which is very bullish.
This is also a reversal price pattern, which implies that once price breaks above the neckline, prices will continue moving higher.
EURJPY dropped away from at a key resistance level. However, we’ve subsequently seen a massive bullish key reversal in the direction of this trend and the huge bottoming pattern.
These reversals often point in the direction the market wants to take.
That being said, there will be a lot of turbulence around the nearest resistance area and the next one at 136.
But traders with a long-term focus should start getting long here. Take a small position with the view of building a bigger position over time – that’s how you can prepare for what should be an upcoming monster move in EURJPY.
Meanwhile GBPJPY (the British pound versus the Japanese yen) also supports my instinct that we’re at the beginning of an important, huge move in these yen pairs:
GBPJPY looks like one big rounding bottom since 2016.
This is laying the foundation for a massive takeoff above the neckline. Theres’ some historical resistance in 2008 which GBPJPY recently retested.
Then last week's key reversal implies considerably higher price. I always say the bigger the base, the more into space. There’s a lot of space overhead in GBPJPY.
And as with EURJPY, the real opportunity lies is building positions over time.
There’s another similarity with EURJPY too:
There’s a double bottom and inverted head and shoulders here. GBPJPY pierced the neckline around 147 and subsequently retested it before rising to a new high.
A lot of the risk has been taken out of this pair for a move to the upside.
However, GBPJPY gyrates all over the place, so keep your stops wide. Build a position over time and I think we’ll see considerably higher prices over time in GBPJPY.
Another pair that’s prone to considerable gyrations is GBPNZD (the British pound versus New Zealand dollar):
GBPNZD hit a major resistance level at 190, broke above the neckline, and then dived below it.
However, my instincts tell me this pair is still going higher based on the historic bullish price patterns.
We'll have to see how prices follow through next week, although negative moves like we’ve just seen do test your patience and discipline. But I’m still long until proven otherwise.
To put this into perspective, if I'm going to get out of my longs, then I should also be willing to short here. And when I short something, I also have to visualize the path of where prices are likely to fall.
I find it very difficult to believe that prices are going to cut through GBPNZD’s recent rally like a knife through butter. So I feel that like Humpty Dumpty, GBPNZD will find a way to put itself back together again and find a way to go higher.
Now here’s NZDCAD (the New Zealand dollar versus Canadian dollar):
This pair traced out in important double top at 99 which has been the governing pattern ever since.
Prices have moved lower over time, but NZDCAD is now at an important support level. I don’t see this support lasting long. The market is just backing and filling before the next leg lower.
I remain short NZDCAD with my stop loss just above recent highs at 87.57. I have faith NZDCAD will pierce the 86 level and drop significantly in the white space below.
A chart I haven’t reviewed in a while is EURGBP (the Euro versus the British pound):
This market has a propensity to trade sideways and stay within a range. That doesn’t match my trading style which is based on major moves up or down.
However, EURGBP is showing some price action that could translate to a significant move up from the recent congested trading range it’s been trapped in for the last several weeks and months.
There’s a fairly recent double bottom and what could be an emerging double bottom right now.
There have been a couple of key reversals within that potential double bottom, suggesting that EURGBP could bounce higher relatively soon.
If you put a buy stop above recent highs with a stop loss below recent lows, that’s a good risk reward opportunity if you have some patience.
Now onto the precious metals …
Here’s XAUUSD (spot gold):
For the last several months, I've been looking at gold through the prism of an ascending broadening price pattern. This is typically a bearish formation.
Hitting the lower edge of this pattern implies prices will break lower all the way to the base of the pattern at $1,150 - $1,200. However, it’s also very possible that gold could bounce higher after testing that line.
Right now it feels like XAUUSD is going to give us that test at $1,725 or so.
That’s because last week was a small inside bar which suggests energy is being stored up for the next move. I feel that energy will be released to the downside. Therefore I’m looking for any bounces to get short with the idea of holding until gold hits the lower edge of the ascending, broadening pattern.
For comparison, here’s XAGUSD (spot silver):
Silver’s implied direction should be higher after it thrust out of an inverted head and shoulders last summer and then made a double bottom at $22.
Prices have also been moving within an ascending triangle as they continue to consolidate.
Silver looks stronger than gold at this time, which is a good reminder to trade each instrument on its own merits and not think of them as linked together just because they’re both precious metals.
For now, silver looks range-bound and landlocked with a bias to the upside.
Last week, the S&P500 and the NASDAQ made new highs but the Dow Jones Industrial Average (DJIA) did not.
Sometimes when two markets go to a new high and the other doesn't, it's called a non-confirming bull market. But the path of least resistance still looks higher.
That’s because last week, Fed chairman Jerome Powell said he wasn't inclined to put his foot on the brakes of his loose monetary policy anytime soon. So we can anticipate low interest rates for quite some time despite a considerable jump in inflation recently.
Powell said higher inflation looks transitory and that he expects it to abate sometime next year. So with a very dovish Fed, I expect we’ll see much higher prices in stocks and the stock indexes.
Here’s the NASDAQ:
The recent close about key resistance suggests higher prices are on the way.
Accordingly, one of the stocks on my radar is BYND (Beyond Meat):
This one has been a circus ride.
I'm looking at what this chart is doing as well as what it didn't. By that I mean that after the double top price pattern, BYND should have plunged to oblivion once it broke the neckline.
Yet it didn’t. BYND instead climbed back over the neckline and rallied strongly. That created a bear trap for those who went short.
Such bear traps can uncoil in the other direction very, very quickly. That’s why I'm looking at the latest small key reversal as an opportunity to go long.
If BYND makes new highs around the $152.50 area, then it’s likely to go much higher.
Another chart that looks to have very favorable price action to the upside is that of Moderna (MRNA):
This is one of the companies that produced the COVID-19 vaccine.
MRNA has been trading within an ascending triangle until its recent breakout. The stock retested the triangle’s upper line and this strongly suggests the stock could go considerably higher from here.
The long-term prospects for MRNA look very appealing on the long side. Buy any dips and hang on with wide stops.
And that’s it for the week!
To summarize: I’m bearish on JPY and therefore bullish on USDJPY, EURJPY, and GBPJPY. I remain bullish on GBPNZD and bearish on NZDCAD. EURGBP looks interesting on the long side.
I’m neutral on silver and bearish on gold.
And both BYND and MRNA look like promising ways to play the explosive upside of the stock market indexes, particularly the NASDAQ.
I wish you a very healthy and prosperous trading week.
Mark "J-YenMajorParadigmShift" Shawzin