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Two Currencies, Two Trends

11/20/08 08:46:16 AM
by Donald W. Pendergast, Jr.

The trend is your friend — until it ends, anyway. The yen may be ready to soar to new heights, even as the Canadian dollar struggles to find a floor.

Security:   JY
Position:   Accumulate

Currencies have been among the most trendworthy financial instruments to trade, especially since the US dollar began to plunge in 2002. Commodity currencies, particularly the Australian dollar and Canadian dollar, did especially well until 2007–08. In less than a year, the Canadian dollar lost nearly 30% of its value against the US dollar. At the same time, the yen has gradually emerged as the new currency star, racking up consistent gains against the greenback since mid-2007. Let's examine the yen first and see if we can determine if this monthly trend is likely to continue (Figure 1).

FIGURE 1: JAPANESE, YEN, MONTHLY. Three pennants all suggest further upside is imminent.
Graphic provided by: MetaStock.
Graphic provided by: Multi-indicators fromProfitTrader for MetaStock.
The smaller monthly pennant, formed by the series of higher lows and two lower highs, appears to have been decisively broken as the last completed monthly bar closed above the upper blue resistance line. There are four other technical clues that also put the yen's long-term trend bias squarely into the bullish camp:

o A higher high and higher low is in place.
o Price is on the preferable side of the 20- and 50-month exponential moving averages (EMAs).
o The spread between the 20- and 50-month EMA is widening.
o The ultimate oscillator has a very bullish configuration, complete with higher highs and higher lows.

From my perspective, once the R1 resistance zone is cleared, the yen should have smooth sailing all the way up to R2, which is near the April 1995 high. If the dollar finally rolls over and continues its long-term downtrend, the upward march to R1 and R2 should become much easier. Commitments of Traders (COT) data also suggests that the large specs (trend-following hedge funds and so forth) are still solidly in the bull camp for the yen.

FIGURE 2: CANADIAN DOLLAR, MONTHLY. The loonie sits at a critical Fibonacci 61.8% support.
Graphic provided by: MetaStock.
Graphic provided by: Multi-indicators fromProfitTrader for MetaStock.
Now we cast our gaze at the technically troubling graph of the Canadian dollar (Figure 2). Having shed more than 30% by mid-October, price is, for the moment, respecting the important Fibonacci 61.8% retracement level along with the inner Keltner band, but the sheer momentum behind the year-long selloff suggests that lower price levels may yet be in store for the loonie. A break of Fibonacci 61.8% support means that a trip down to the 0.7200–0.7300 level is a distinct possibility. A possible bullish omen is the ultimate oscillator reading; at 37.36, it's still much higher than the 30.07 recorded during October 1998, also a time of global financial panic. Given that the 2007–08 global crisis is much worse, this indicator may actually be telegraphing an early warning that the worst of the Canadian dollar plunge is already over.

So what's next for the yen and the loonie? No one can say for certain, but it would be very unwise to bet against powerful monthly trends in any currency market. If crude oil, natural gas, gold, silver, and uranium all recover a sizable portion of their bull market gains, expect the Canadian dollar to recover, right alongside those vital commodities. For the time being, the yen is a solid long-term "accumulate" (on weekly dips) and the Canadian dollar is a '"wait and see."

Donald W. Pendergast, Jr.

Donald W. Pendergast is a financial markets consultant who offers specialized services to stock brokers and high net worth individuals who seek a better bottom line for their portfolios.

Title: Writer, market consultant
Company: Linear Trading Systems LLC
Jacksonville, FL 32217
Phone # for sales: 904-239-9564
E-mail address:

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Date: 11/25/08Rank: 5Comment: 

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