Is the Yen Putting in a Long Term Top?

By: Sol Palha | Tue, Nov 15, 2011
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"It is easier to find a score of men wise enough to discover the truth than to find one intrepid enough, in the face of opposition, to stand up for it." ~ A. Hodge

Japanese Yen

If one looks at a 10-20 year chart of the Yen one cannot help but come to the conclusion that the Yen is going to experience a huge correction at some point in time. The pressing question then, is exactly when will this occur? Nobody can give an exact date, but examination of 1 and 2 year charts reveals that we are getting closer and closer to this point.

The main trend line is still intact in the two year chart, and until the Yen can close below 125 on a weekly basis the action will be very volatile, but the bias will be towards the upside. The channel formation that is taking shape (from the 127.60-132 ranges) has experienced its second break to the downside; the first one took place in Aug, and the second one occurred roughly 2 weeks ago. This in our opinion is a subtle sign that a long term top is taking shape. Our top timing indicators have already generated a series of very large negative divergence signals.

Interestingly the 200 MA and the main uptrend both intersect roughly at 125.50; this is only 50 basis points away from the 125.00 price point level. A weekly close below at or below 125 will be the first strong signal that a long-term trend change is, in effect.

An examination of long term cycles reveals that a market that experiences waves of erratic action after it has experienced a huge run up is usually close to approaching a multi month and possibly a multi year top. The action in the Yen has been anything but orderly, especially in the last 6 months.

Japanese Yen

If we move over to the 1 year chart, we see that the main up trend line has been violated; if the Yen remains below 131.20 for more than a week, it will signal that the Yen is more likely to test the 125.50-126.00 ranges, then surge above 132. The above chart clearly illustrates the strong support the Yen has at 125; a weekly close below this level will/should indicate that the Yen is at least ready to re test the 117-118 ranges.

Let's not also forget that we are in the midst of a currency war. No nation (especially ones whose economy is strongly orientated towards exports) wants to see its currency appreciate in an uncontrollable manner. Switzerland one of the most stable and neutral countries in the world finally capitulated and joined the "devalue or die club." They effectively drew a line at 1.20 stating they would do whatever it took to maintain this rate. As they have the capacity to print unlimited francs, they should be able to hold this line for sometime. Since making this statement back in August the Franc has shed 22% of its value. It has not even come close to testing its Aug highs of 141.50; the franc is currently trading at 110.06. On the same token we believe that the Japanese are not going to sit idle while the Yen appreciates. After suffering from one of the worst earthquakes in decades (the Great East Japan Earth quake) and with the economy slowly sputtering back to life, the Japanese are definitely going to become proactive when it comes to taking action against a strong Yen. They have intervened twice already, and we suspect that sooner or later they much like the Swiss will draw a line in the sand. Japan cannot afford a strong yen as exports play a vital role in its economy; a strong Yen makes its products less attractive to the rest of the world.

What is taking place is a part of a larger phenomenon we first spoke of several years ago, "the devalue or die era" where nations constantly devalue their currency in order to maintain a competitive edge. At that time, we stated that this would eventually lead to a massive currency crisis. The financial crisis of 2008 was a taste of what was to come. The Euro crisis is still in its infancy and perhaps when it completely unfolds it might prove to be the big one, we spoke of many years ago. In such times of uncertainty investors should at least have some portion of their funds in bullion (Gold, Silver, Platinum, etc.). As Gold is still trading near its highs, investors would be best served by waiting for strong pull backs before opening up new positions.


Conclusion

From a long-term perspective, the Yen is trading in bubble territory. On the surface, it makes no sense that the Yen is appreciating given that the country is still recovering from the effects of the massive earthquake. In contrast when New Zealand was hit with an earth quake, the Kiwi plunged. Whatever the reasons for the recent (and experts have put many forward) strength, the charts and our technical indicators both suggest that the day of reckoning for the Yen is near at hand. One way to benefit from the long-term decline of the Yen would be to open up positions in YCS, or if you are more aggressive, you can purchase call options on YCS. The most lucrative method would be via the futures market but one needs to know what one is doing and be ready to move fast; a huge profit could turn into a loss if one overstays one's welcome. For example, depending on where you opened your short position, you could have lost a significant amount of your profit or the profit could have even turned into a loss if you did not close your position on the 31st of October. We have been playing both the long and short side in the Yen via our VIP future's service. We locked in many a profitable trade in the Yen but scored two big hits both on the short side when the Yen broke rapidly broke down; once in Aug and Once in Nov. On each occasion subscriber's locked in excess of 7K per contract.

If one looks at the big picture what is taking place in the currency markets today, it clearly validates our long-term view- one that we have maintained since 2002; that view being that the ultimate currencies to hold are Gold and Silver. It is our opinion that long term traders would be best served by constantly deploying a portion of their funds into Gold and Silver bullion every time these markets experience a strong pull back. The back-breaking drop silver bullion experienced from $48 to the $26 or when Gold dropped down to the mid $1500's in September are prime examples of how traders could use strong pullbacks to open up new positions.

We expect Gold and Silver to experience extreme bouts of volatility in the next 6-12 months. As the dollar is projected to rally for several more months, the Gold and Silver markets could experience stronger corrections going forward. The short to intermediate outlook for Gold and Silver is not as bullish as it was 6 months ago, but the long term picture has not changed at all. The long-term outlook for both Gold and Silver is still very bright.

The erratic action in the Yen continues; today, it spiked down to 128.85 but then recovered these losses just as fast; the entire move took place in the span of roughly 1 hour. As we stated before, erratic action is an indication that a market is approaching some sort of top. The action has been extremely erratic in the Yen so it seems likely that some sort of top is close at hand; what remains to be seen is if this will be a long-term or short term top.

Interestingly enough it seems like the major currencies of the world are all going through very trying phases, and we are sure that a point will be reached where the masses will feel more confident in putting their money into something tangible rather than holding onto worthless pieces of paper. The easiest commodities to physically own are Gold, Silver, Platinum and Palladium. As Gold and Silver are more widely known the average Joe is more likely to plough his money into these metals.

The extreme fall the US dollar has experienced since 2002 and the current crisis the Euro Zone is experiencing clearly indicate that as long as nations spend more than they earn, it's just a matter of time before the world is forced to deal with another financial crisis. As long as fiat currencies exist, the world will experience back breaking financial disasters. Fiat currencies allow governments to manipulate the money supply as they see fit and we all know that governments can never be trusted to do the right thing. Hence giving them the ability to create money out of thin air is the equivalent of giving a child a box of matches while placing it in front of can of gasoline.

 


 

Sol Palha

Author: Sol Palha

Sol Palha
TacticalInvestor.com

Sol Palha is a market analyst and educator who uses Mass Psychology, Technical Analysis and Esoteric Cycles to keep you on the right side of the market. He and his partners are on the web at www.tacticalinvestor.com.

The information contained herein is deemed reliable but no guarantee is made about its completeness or accuracy. The reader accepts this information on the condition that errors or omissions shall not be made the basis for any claim, demand or cause for action. Any statements non-factual in nature constitute only current opinions, which are subject to change. The author/publisher may or may not have a position in the securities and/or options relating thereto, & may make purchases and/or sales of these securities relating thereto from time to time in the open market or otherwise. Neither the information, nor opinions expressed, shall be construed as a solicitation to buy or sell any stock, futures or options contract mentioned herein. The author/publisher of this letter is not a qualified financial advisor & is not acting as such in this publication. Investors are urged to obtain the advice of a qualified financial & investment advisor before entering any financial transaction.

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