USDJPY Going down?!?

[Mercury]

I have been unsatisfied with the large rally scenario on this pair, which assumes the Brexit drop put in the bottom of the move down from June 2015 [see thread USDJPY beginning of Long campaign?].  When the general groundswell is firmly in one direction and I start to feel "sure" I have it right I start to get worried and force myself to look for alternatives.  Anyone who does long term big picture analysis will have experience the moment when a surprise move against you becomes obvious when you look again at your analysis.  So in that vein I looked at this pair and saw a very credible alternative.

 

The Weekly chart (below) shows my original position that the Brexit low was a wave 4 down and not the end of the move.  The recent high forms a Triangle retrace pattern.  A break of the lower triangle line (and Fib 50%) brings the Fib 62% (9500) into scope as a target for the bottom of the whole move before that strong USD rally in the long term set ups.

 

Looking at the retrace in close up on the Daily chart you can see that the wave 3-4 (blue) retrace off the Brexit low is in an A-B-C form and then the next move down is 1-5, suggesting the trend is still down at that point.  Another A-B-C brings the market back up to the 28 Oct high forming the new Triangle line with NMD and same on RSI and Stochastic.  So far everything points to the down trend being intact but you can see the alternative more bullish set up in red labels so the Weekly tramline breakout support point and the Triangle at the Fib 50% become critical support/breakout zones.

 

Looking now at the 4 hourly chart, if Oct 28 was indeed an wave 2 turn then I would want to see a fairly quick and short wave 1-2 (brown) to set up the long and strong bearish wave 3.  The Weekly tramline breakout support is an obvious point to get this retrace BUT that could also be an A-B in keeping with the more bullish long term scenario.  A break of the small triangle down to the tramline breakout support may offer NMD and with RSI and Stochastic oversold then a rally is likely.  At that point we would be looking for a suitable turn back down, probably Fib76% at this point, which coincides with the ending triangle breakout resistance level.  If all goes to plan then we should then get a long and strong bearish move back to the Triangle line and then either a breakthrough this for a bearish move lower or a rally in the bullish scenario.

 

The bearish scenario fits other set ups better in my view with USDCHF in a strong wave C down, GBP on a rally and EUR also looking more and more like it will rally hard.  I don't think this is immediately set and we have to get past the US election but I can't help feeling the USD is NOT ready to rally hard and will go into further retrace to prime that rally.  My analysis on DX [separate thread] shows this more bearish medium term scenario also, this is not new, but on USDJPY I am much more confident now with a bearish scenario.

 

As always eager to hear views, especially from those who disagree.

 



[2Sigma]

I see a lot of lines on your chart but no where do I hear about your thoughts on Fed Dec meeting, BoJ Dec meeting, US election outcome etc. There are too many headline risks for you to just look at the technicals, i.e. you are trading blind if you just do.

[donaldprice]

Glad you share your thoughts with my previous thread. It is no guarantee, however with Elliot, often a wave 2 will look completely different from wave 4 which as you know would be alternation. I myself look at this way, if the top of the decending trendline is not broken, then the triangle is still in play and W5 of C has not terminated. Forget the Trump uncertainty, corrections are well know to last a long time, just look at dollar cad and aud usd as examples. Therefore for me I would be selling into the rallies, although logically the previous channel is broken, it could re-enter again. From a fundamental view, their is now the emergence of political uncertainty not just in the US, but also with Italy coming up towards the end of the year. Also COT data still shows heavy longs on the YEN. However we will without doubt see a bounce on the upper part of the triangle to form potential WE before completing W5. So I maintain my bearish view until proven otherwise.

 

[Mercury]

Hi  thanks for your observations and to a degree you are right in that I purposely do not consider near term so-called fundamentals or risk events, except insofar as they pertain to short term volatility risk/opportunity and as a step in my long term big picture scenario set ups.  This is because my thesis is that the markets make whatever they want of "news or events" based on the bias that preexists as sentiment according to the big picture backdrop rather than the particular event itself (other than black swan events of course).  So if an event happens in line with the bias the trend is maintained, if not then an alternative scenario, possibly trend reversal, could happen.  I usually operate with several scenarios in play, as I have with this pair, and let price action help me determine which one is in play but this is all within the technical scenarios I have analysed out, this is the only way I have found to make sense if things.  Also we cannot ever know to what extent such events have been priced in so cannot discern the likely reaction ahead of the event via fundamentals.

 

What do I really mean by that?  I believe that the 2 forces at play in the markets today are as follows:

1. Bullish "head in the sand" blind following of the Fed and other central bank economics PhDs who think they can engineer themselves into perpetual prosperity.  This is what I call the Gordon Brown "no return to Tory boom and bust" delusion and look how that played out for poor ol' Gordon...  Bottom lie here is that markets and macro economics work in clearly recognisable cycles and it sure looks like we are at or near the top now and long overdue a serious correction or crash.
2. The Bearish view that the Fed and others are in reality powerless in the face of natural market forces and the only reason the mega crash cycle didn't happen during the credit crunch is because of unprecedented intervention that has had no discernible effect on the actual economy in terms of growth and headline inflation (although real inflation is there for consumers), but has had an effect on asset prices (the very definition of a bubble).

 

From the way I wrote that you can easily discern my bias!

 

So I do look at fundamental but only in the big picture, not on a day to day or week to week basis.  I use technicals as a proxy for market sentiment and cycle identification, which is underpinned by the big picture fundamentals, indeed this is the whole point behind technical analysis, to map market sentiment through price action and to monitor events within that framework to figure out which of the possible scenarios is more likely and identify good trade opportunities.  It is a continuous process and prone to bias changes, which is a good thing as one needs to have an open mind at all times and second guess ones bias.

 

The issues you mentions have been discussed in depth in other threads by me and others so I chose not to repeat them in each post but to answer your valid challenge here is what I think:

 

• Re the Fed Dec rate rise or not and the US election, it seems to me that the medium term rise in the USD and drop in stocks has been based on the expectation that a rate rise will happen in Dec.  Recently the election has taken over as the key issue on traders minds and as The Donald has come more into contention a risk off bias has emerged plus a drop in USD.  If Trump wins I see a continued sell off reaction, which probably spells the top of the market, but if Clinton wins (the Wall St favourite) I see a rally in stocks to a new all time high and possibly short term rally in USD as well but then USD drops back as stocks surge.  I would not bet so heavily on a Dec Fed rate rise in the face of deteriorating NFP.  It may also depend on who wins the election.  My bias is that the Fed will either not raise rates until the carnage is over (i.e. a mega crash) and in such a situation the market does it for them via bond yield curve increases as the bond bubble bursts OR alternative the Fed raises rates once and precipitates the crash.  I actually think this issue is far more relevant than the US election.
• Re BoJ I have less instinct into what they might do except it seems that they have shifted approach because QE and NIRP is not working.  This all smacks of desperation in an economy that has been in depression for decades with no sign of coming out of it.  With the Yen being so high vs all major currencies I do feel that eventually this will start to move in the other direction, and my long term bias is for USDJPY to rally hard, but as a result of global economic factors rather than BoJ actions (i.e. a massive rally in USD driven by asset bubbles bursting across the board).  In the short term I feel the Yen is a safe haven play.
• Re BoE, which you did not mention, I think they have halted their post Brexit stance because they don't have to take action to weaken the GBP and prop up the economy.  GBP will fall further vs USD because it has to based on the balance of payments but other currencies will overtake the rate of decline of GBP, especially EUR as the EU and Euro begins to unravel in 2017.
• Re ECB, which you also did not mentions, I think they are stuck because they have little room to maneuver as their policies have not produced the desired effect and there are huge EU existential crises on the horizon in 2017 that dwarf the US election in potential ramifications.

So net, I purposely ignore short term risk event headwind because no one can really make sense of what the markets may or may not do.  As  suggests you have to wait and see how they react and assess what that may mean and then trade.  I stay focused on the longer term issues and fundamentals and assess how the near term events play out in the context of my long term scenarios.  I get to long term scenarios through Technical analysis that fits with big picture fundamentals as I understand them.  I would only reassess if a major event, such as a Trump victory, occurred, which would lean towards one particular scenario over others.  Until then I recognise all scenarios and plan accordingly.

 

With respect to USDJPY, and the DX, I see 2 clear scenarios as follows:

 

1. A bottom/turn has already formed and we are in the early stages of a rally behind a strengthening USD - what would drive this?  Asset bubbles bursting OR US economic resilience while others are crashing.  I favour the former option.
2. A bottom has not yet formed and we get short term risk off turbulence leading to a stocks rally and a weakening USD - what would drive this?  The risk events you allude to plus a surge in stocks post US election and possible reduction in Fed rate rise probabilities due to worsening economic data, in particular labour participation.  The Yen is often used as a safe haven.

So my bias is for scenario 2 at present but I may change my mind if The Donald wins.

 

What is your assessment?

[Mercury]

Normally I wouldn't post again so soon but last night's gap jump has accelerated the road map on this pair (and many other markets I guess).  So far the gap jump is in line with my analysis, albeit a slightly earlier turn that the perfect set up (when is it ever perfect?).  The Daily chart (not done yet of course) suggests a wave A or 1 (brown) is done and the market is now in retrace.  I guess there is a possibility that the turn was already as a full retrace (A-B-C) and the market would then blast up through the upper Triangle line (Orange circled zone) but I don't think so just yet.  I expect the Gap to be closed.  If you look at the Hourly chart you can see the possible A-B-C (red) so one has to guard against that scenario and a breakout through the upper resistance zone must be seen as a Long opportunity.  However my lead scenario is as before so I expect to see a turn back down at wave B or 2 (brown) at the Fib 76% resistance zone and ending Triangle breakout down.  This would begin a fairly extensive bearish move under 2 possible scenarios, as outlined in a previous post.  If I see NMD with a turn at the Fib 76% zone then I am minded to go Short, notwithstanding the US election risk (i.e. depends exactly when this occurs).

 

If you are into fundamentals, well it is all so short term it is hard to make sense or rely on anything until the polls start coming in but in essence I guess the FBI email clearance rally may run out of steam due to a lack of anything new and a few poll nods to Trump may be enough to reignite the risk off crowd and take things lower.  The breakout scenario is likely to be on extended Clinton win thinking but I'd imagine an actual breakout would not occur until we got some critical polls tomorrow night.  Worst case this market hangs around a critical junction (Fib 76% or near the upper Triangle) until major polls ignite the move one way or the other.  Could be a dead few days until then...