Lessons from the Yen: We’re in a tough spot

Normally I do my weekly snapshot on Monday morning. The process is simple – I run through my charts and I identify potential opportunities to trade. Then I write them down and share them with you. Most never set up as trades – that is the nature of price-action trading when your goal is a high win-rate.

As I was running through my charts today, I came to the conclusion that the majors were probably going to put in a mixed bag for the week ahead. I think no chart shows this better than the USDJPY – so instead of going through a bunch of pairs, I’m going to focus on just one, and highlight some of the challenges we’re facing right now.

Your honour, I start with a case for the bulls:

Bullish arguments

Evidence 1:

The USDJPY bulls haven’t been stopped at the current level, in the past. Sellers took over at 114.30 -that’s another 150 pips to go before the same sellers, who indisputably drove price down from that level, might consider selling again. Why should those who are keen to sell not be patient and wait for the opportunity to sell at a better price?

Evidence 2:

I put it to you that the price structure we’ve seen in the recent rally has been exceptionally bullish. What I mean is that price hasn’t aimlessly drifted higher.
Have a look at the bullish candles that I have marked with blue arrows. They are:

  • Big
  • Have closes near the highs
  • The move price higher
  • There are more of them
  • Smaller
  • They don’t really move price anywhere – they just pause the market
  • There aren’t very many of them

I am exempting the price movement we’ve seen in the green box from this argument because it suits the bearish case better. We’ll come back to that.

Evidence 3:

The weekly chart primarily supports the bullish case. I’ve included a poorly drawn channel to show my reasons. Let’s consider what price has done. We see an initial breakout to the upside that failed (1) and price quickly fell back within the channel. However, instead of meandering back to the other side of the channel, price hugged the upper trendline (2), a sign that buyers were stepping in. Finally, we see a breakout that sticks (3) and we’ve seen 4-weeks (4) of consistently higher highs, and closes.

Evidence 4:

The big players are mostly long. The chart above shows how asset managers and institutions are positioned on the pair. We’re looking at JPY/USD here, so you need to reverse your thinking when comparing data above to USDJPY charts.

The big money is mostly (by quite a large margin) long USDJPY (or short JPYUSD). They expect price to go higher.

The bulls rest (no doubt one could find many more arguments, but these are my main points).

Bearish arguments

Evidence 5:

As any good debater knows, using the opposing team’s evidence against them is a great way to win an argument. So I’m bringing up Evidence chart 1 again:

Let’s consider this a bit differently. Sure, in the past (emphasis on past), price needed to go higher before turning around. There are three very straight-forward counter-arguments

  1. The past doesn’t necessarily mean anything. We see support and resistance hold sometimes and sometimes fail without pause. The implication is that support and resistance (and therefore pockets of buyers and sellers influencing supply and demand) is inconsistent and can’t be relied on.
  2. Price didn’t stall out at the current level in either previous push higher, it just blasted right through. Since price is clearly stalling out here, that is evidence that the momentum has shifted, i.e., we cannot ignore the sellers already involved. They are here, now.
  3. What if the buyers who managed the previous runs to 114.30 just aren’t there anymore and this high is as good as it gets for the bulls? The fact that price has stalled out lower down suggests that this might be the case – which is a very strong argument for the bears.

Evidence 6:

Price trends don’t really need to “slow down” to reverse. Consider the previous bullish run, and how it ended. Here too we see everything in price that suggests that the bulls are in control. Strong, high closes, big candles that gain a lot of ground, easily contrasted with small bearish candles that are few and far between, that don’t really go anywhere.

And then just like that, price turned around and fell hard.

Evidence 7:

If the best case for the bulls is the strong bullish structure (see evidence 2, and counter 6 above) then what we’re seeing now clearly implies that the bulls are no longer in control, especially in the recent price action marked by the green box.

Furthermore, we see price hasn’t even been able to maintain its supporting trendline (breaking down below somewhere in the red circled area). This suggests that price is going to have to move lower first before any new buyers might enter.

Evidence 8:

Friday’s NFP candle went higher than we’ve seen price go in this recent consolidation. And then failed.

This is significant and let’s unpack why.

If you were a trend trader, it’s very likely that you would have had long orders above the recent consolidation that would trigger only when price pushed higher, and then, hopefully, the market kept on going. Your orders would probably be in the blue box I have drawn in. Everything happened for you on Friday, except the “keep going” part. Price got you in (schoolboy error on your part over NFPs in my opinion) and then turned around and closed lower.

In fact, price closed well enough for the bears to print a reasonably good bearish pin-bar, that could be argued, is on resistance.

Evidence 9:

If I decide that slightly older support and resistance levels are relevant (and any support and resistance trader will agree that they are), then I can very easily show that the bearish pin-bar that formed on Friday is in fact well placed on resistance. The recent highs are actually less relevant historically and price is at a level that has represented a key turning point.
The bears rest (bears never rest).

The judge’s verdict

Different views on where price is going are what make a market. I’ve shared some of the stronger arguments from my own perspective, and I’ll give you my verdict too.

But before I do, there is something a lot more important that I have to say: There will always be people who have a contrary view to your own. You can give me any chart, make an argument for why it’s going to go up, and I’ll supply you with a bunch of reasons why it’s going to go down. The point is this: To be profitable, you need to know and trust your system and stick to it. Ignore the noise, from wherever it may come.
Here is my noise: I think the Dollar bulls are going to win. I think price is just pausing at the current level and may continue to hang around for awhile, but I think we’ll see 114.30.

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