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USD/JPY had a positive session during the Monday trading day as we are simply bounced off of the support area below. Looking at the charts, the real question then becomes whether or not we are fighting massive support in the area, or are we starting to form some type of bearish flag?
If we are forming a bearish flag, the "pole" will measure for a move down to the 76 handle. This is interesting, as it was the absolute bottom last year in this currency pair. This would suggest that once a move down to that level may run into the same kind of massive support that it did last time. Of course, it was revealed later that a lot of that massive support was the Bank of Japan, and they have made it very clear that they are willing to get involved again.
On a daily close below the 78 handle, we think that this market will eventually make a run towards 76. However, we also believe that the Bank of Japan will intervene in one form or another, and this would be very dangerous to be involved with from the short side. In fact, if we get some type of supportive candle below 78 we are more than willing to take that long position knowing that the Bank of Japan will get involved sooner or later.
On the other hand, we see any type of move above 78.75 on the daily close as a signal that we are heading back towards 80. In that event, we will be long of this market as we think consolidation will probably be the norm for the foreseeable future.
It's once we are above the 80 handle that things will get really interesting. 80.60 is an area that has significant resistance, and if it gives way we could see a move all the way to 84 or so. Once that area gives way, we are holding onto this trade from the long side or months if not years. It is at that point that this would simply become a return to the old carry trade days.