USD/JPY: Breakout And Pullback Off The Bottom

10/18/07 09:05:05 AM

by David Penn

An ascending triangle bottom in August and September hints at higher prices for the greenback against the yen.

Security: USD/JPY
Position: N/A

The last time I took a look at the greenback/yen currency pair for Traders.com Advantage ("The USD/JPY Breakout Stalls At Target," June 22, 2007), the market had just reached a projected target near 123.50. The significance of this level was that it coincided perfectly with a swing rule–derived projection based on a dip in early June.

What I did not know at the time was that not only had the USD/JPY reached its swing rule target, but the pair had also reached the end of the advance it had enjoyed since an early March bottom just north of 115. In fact, the day the article was posted was the day when the USD/JPY topped out with an intrasession high 124.15.

FIGURE 1: US DOLLAR/JAPANESE YEN, DAILY. An early October breakout in the USD/JPY finds resistance at the 118 level and pulls back to find support at the breakout level near 116.50.

Graphic provided by: eSignal.

Since that top, the USD/JPY has been in a dizzying meltdown, falling from just above 124 in late June to as low as 112 on an intrasession basis in the first half of August. In the month since the August bottom, the USD/JPY has consolidated in a largely sideways range with a slight upward bias. Whether this consolidation's upward bias — and its virtually horizontal support level at about 116.50 — is a true ascending triangle is probably immaterial. But what seems clear is that the market for USD/JPY did break out of that consolidation in earliest October and, by midmonth, has executed a test of resistance-turned-support at the breakout level. See Figure 1.

It can be helpful to consider a failed breakout like the handle of a cup with handle pattern. The handle often develops as an attempted move to breakout fails. Because the market has upside momentum, the pullback is relatively shallow — more shallow, for example, than the correction that caused the cup — and the resumption of upside momentum tends to be swift. Similarly, a failed breakout such as the one in USD/JPY serves to shake out weak hands before the "real" breakout occurs sometime afterward. These weak hands returning to the market is in large part what helps produce the often-sizable moves after breakouts that initially fail.

The consolidation measures from 116.50 to about 113 at its widest point, suggesting an upside move to as high as 120. Interestingly, the 120 level also represents the August highs in the USD/JPY and, save for the newly created, potential resistance at 118, is the only thing likely to stem an advance in the USD/JPY.

David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

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USD/JPY: Breakout And Pullback Off The Bottom

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