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The outlook for $/yen is similar to the view for the dollar versus most other major currencies, as trade from the March 17th low at 96.15 and is seen as a correction (wave 4 in the fall from the Dec high at 114.65, see numbering on daily chart below), and suggests an eventual resumption of the declines back to 96.15 and below (within wave 5). For now, would short here (currently at 99.60). However, the confidence level that this period of correcting (wave 4) is indeed “complete” is not yet extremely high, and keeps open the potential for more wide ranging and even a temporary break above the recent 101.00 high (38% retracement of wave 3) first. Despite the lack of high confidence, it still appears to be a good risk/reward trade as a close above the month long bearish trendline (currently at 100.50/60) would greatly increase the risk for more topping/new highs, and would be a sign to stop (limited risk, but would be looking to resell at higher levels). Remember, it’s not just about trying to pick market direction, but trying to get in to consistently good risk/reward trades. This includes times when the confidence level is not extremely high, but the large potential payoff more than compensates (as in this case). Nearby support is seen at 98.60 (earlier low, 50% retracement from the 96.15 low). Note only temporary weakness on the March 17th short at 97.25 before stopping just the next day above the broken base of the multi-month bear channel (then at 98.85, closed at 99.80).

Longer term, the bearish bias remains in place with further declines toward the base of the 6 year bearish channel (currently at 95.00) and eventually a retest of the Apr 1995 low at 79.80 still in place. Note too that the downside pattern is still quite far from “complete” (currently within wave 4 in the fall from the Dec high at 114.65, and also wave III in the fall from the Oct 2007 high at 117.90, see numbering on weekly chart/2nd chart below). For now, would maintain the longer term bearish bias but note that there will no doubt be significant, countertrend bounces (minimum 7-8 yen) along the way as this longer term downside pattern continues to unfold over the next number of months.

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David Solin
Foreign Exchange Analytics
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Disclaimer: The opinions expressed herein are those of the author and not a recommendation to buy or sell specific securities.