Yen Breaking Down

The Japanese Yen broke to its lowest level since March when BoJ's Kuroda began speaking tonight. Additional data was also released from Japan shortly after. The level we are breaching (.8750) was tested in May and in July of this year. The decline to this support area this most recent time was more gradual. We also spent more time consolidating right above it. I notice that when markets reject a level, it is often done quickly. When markets pause and consolidate, I think the chances of big levels being breached are increased. So, let's first look at how the Yen acted the first two times we tested this support level versus how it acted this most recent time, and then we will talk about the outlook.

First, here is the daily chart. The supportive area is marked with a few lines. I don't like to mark exact levels as support or resistance because I think markets can be a little too noisy for that much accuracy.



Let's also look at the Nikkei 225 futures. They have staged a massive rally since August. This is around the time that the Yen began its recent descent, albeit at a much more moderate pace than the rally in the Nikkei. Technically, the Nikkei ripped through resistance and never looked back. Fundamentally, this rally, and the decline in the Yen, is on the back of ultra-loose monetary policy in Japan.

That is the theme in Japan right now. Weak currency, strong stock market. Now let's zoom in on the last two tests of the support level that we broke tonight. The first, in May, followed a gradual decline off of the most recent major swing high. .8758 was tested the 9th. We pushed higher, and then over the next 2 days we attempted to get through again. This time we did trade a touch lower to .8752, but rejected it, confirmed a double bottom, and then rallied. The double-bottom confirmation is indicated by the arrow.

A rally almost took us back up to .9200, lower than the previous peak, before turning lower to test support for the second time. Zooming in on this test in July, we can see that this was an even faster rejection. We tapped .8760 twice, then promptly turned around and rallied again. This time we put in a new high above .9300 (again, refer to the daily chart above)




And now, let's look at the most recent test of this level. We have spent considerably more time trading in this area. In May, we were here for 2.5 days, testing the level twice. In July we were here for only 1 day, and tested it twice. This time, we have been sitting here for 2 weeks, and you can count 5-10 tests, depending on how you qualify them. The point is, the market stayed here and seemed to accept these new prices instead of rejecting them right away. I believe that this generally bodes well for a breakout (or breakdown, in this case).



So what now? Since I started writing this tonight, the Yen has rallied, almost pulling back into its old consolidation area. For now, this appears to be a rejection of those lower levels. I think it is too early to call it a final rejection, and there will be some testing of support-turned-resistance. Was this move new shorts coming in? Was it just the big guys 'banging the hive,' trying to shake out weak longs? We will see how trade develops this week and then check back in. My bias remains short.