During the November 2010 - early March 2011 timeframe, Japanese yen futures expressed in U.S. dollars and traded on the Chicago Mercantile Exchange oscillated in a high-level consolidation range around the 121.50 level basis the front month futures (our practice is to quote yen futures in increments of 10 although actual prices are in hundredths of a cent). Range extremes were 124.66 and 118.38 and the March 10 Globex last sale price was about 120.50. In the aftermath of a major earthquake that struck Japan on March 11, 2011 yen futures moved sharply higher as traders began to anticipate large yen repatriations by Japanese insurance companies. The aggressive price advance reached a panic high in early overnight Globex trading on March 17, 2011. Front month futures traded through the historic 126.25 high that was made in April 1995. Fueled most likely by a combination of "carry trade" unwinding plus the stop-loss orders of outright spec short positions and Japanese exporters' options hedges, yen futures spiked to a new all-time high at 129.57 (the inverse USDJPY cash forex traded to a new post-World War II low somewhere between 76.57 and 76.25, depending on which data-feed one uses.

Market action on March 17th and afterward has many of the hallmarks that we associate with trend exhaustion. In our analysis below we will discuss them as they relate not only to a reversal in short-term trend but also in relation to a potential reversal of the long-term trend. Bear in mind that the Japanese yen has been rising in value against the U.S. dollar for 61 years: in early 1950 a dollar would have bought 620 yen while now it will only buy approximately 80 yen. Because the cash currency market (USDJPY) substantially predates the futures market (JPYUSD) our first chart will be a cash chart to give us historic price perspective. After that we will shift to futures charts because they will allow a more detailed technical analysis and because the majority of our readers primarily trade futures rather than cash forex.

The chart immediately above is a monthly closing dollar/yen chart that spans the entire post-War period. The highest value recorded on a monthly closing basis was 620 in March 1950 and the lowest to-date is 80.40 in October 2010. (Obviously the March 2011 intra-month trading was below the 2010 low close which we will deal with when we shift to the futures charts).

In addition to the historical perspective that the chart provides, we have imposed an Elliott wave interpretation on the move from the 1950 high. In that perspective, wave structure appears to consist of 5 major swings. We see four completed waves (circled 1 - 4) and each wave subdivides per the rules of wave analysis: waves 1 and 3 in the primary direction consist of 5 subswings, annotated i - v, while waves 2 and 4 in the corrective direction consist of 3 subswings, annotated a-b-c in wave 2 and a-b-c-d-e in wave 4. Note that wave 4 is a triangle and that triangles although having 5 subswings are interpreted as being an a-b-c structure. Furthermore, the occurrence of the triangle in wave 4 is significant since, in Elliott wave theory a triangle always precedes the final wave in a 5-wave sequence. If our wave interpretation is correct, then the overall 5-wave structure and the classic subdivisions within those waves implies that the entire trend in the USDJPY is at or nearing termination.

Our next chart below is a monthly futures (JPYUSD) continuation chart, essentially the flip side of the cash forex chart pictured above, and it details price action since the 1995 trend extreme at point 3 on the forex chart and we present it mainly to familiarize the reader with its inverted appearance relative to the cash market as well as to illustrate the #4 wave triangle.

Some additional points to consider on this chart are:

1. The classic price behavior following the upside completion of the triangle. An initial exit attempt in early 2008 lacked follow-through as prices poked above the b-d triangle topline but then retreated back into the pattern. The subsequent attempt later that year was successful. After a push above 114, prices pulled back to a low at 98.67 at the b-d topline (labeled PB) then rebounded, thus illustrating old resistance subsequently acting as support. While not of immediate interest, the 98.67 level now defines a major underlying benchmark. Any price move below that level would not only put values back within the old triangle but it also would signify a change in the long-term underlying trend from up to sideways/down.

2. Fulfillment of an upside price target derived from the underlying triangular pattern. In classic technical analysis triangles usually are continuation patterns. When completed they provide fuel for further trend development. Typically, a new trend target is determined by measuring the triangle's greatest vertical distance (in this case from point b to the upsloping a-c trendline - about 29.40 points) and then adding that distance to the level on the b-d trendline where prices successfully exit the pattern. Thus, adding 29.40 to the pattern's exit level at 97.90 yields an upside target at 127.30 (see projected dotted line and horizontal arrow on the chart).

3. Although the 127.30 target was momentarily overrun at the March spike high of 129.57, values did not hold above target. Instead, there was an almost immediate retracement. By month's end values were below February's closing level; market action had established an expanded top reversal range, behavior suggesting that a trend extreme was reached.

4. Accompanying the negative monthly price action, the monthly 14-period stochastic oscillator turned down from above 86 (see red arrow on indicator). Generally, stochastic readings above 80 typify "overbought" momentum conditions that often set the stage for a turn in trend. As we have noted on the indicator the downturn was not accompanied by a negative divergence, which would more forcefully argue the case that a trend turn is in the wings. However, the absolute high level of the indicator, as referenced by the horizontal green line, makes a pretty strong argument for an impending intermediate-term period of consolidation on either side of 125 if not outright price weakness.

The next chart of interest is the weekly continuation futures chart below.

The weekly continuation chart presents a generally positive picture when considered from a price-momentum perspective. Values are rising and are above their rising 40-week moving average (proxy for the popular 200-day moving average). Thus, the long-term trend is considered up although values have essentially traded erratically sideways since October 2010. Our wave interpretation features an overlap of wave 1 by wave 4, a view with which we are not entirely satisified. Two forays outside of the high level range, to the upside in March and to the downside in April, failed to generate follow-through. The 14-period weekly stochastic oscillator near 45 is upsloping and thus it contributes a positive momentum backdrop. Similarly, the 10-period ADX trend indicator is gradually rising. At 27 it is above the 21 level that we generally consider the threshold of an intermediate-term trending price condition. Our overall view of the weekly continuation chart is that it implies potential for price strength into the early or middle part of this year's third quarter. Behavior to monitor that would suggest trend potential counter to that view would be

a) price weakness below 121.00. That would put values under both a recent weekly support level at 121.61 as well as the moving average (currently at 121.06 and rising about 17 points per week);

b) a downturn in the stochastic;

c) a rising ADX occurring with outright price weakness.

Moving to the daily continuation chart below, we want to focus on potential wave structure. One scenario that we presently prefer deals with the last significant uptrend phase that culminated at the March 2011 new all-time high. That move began in May 2010 which we have labeled point 0. Our interpretation is straightforward as you can see: the advance consists of 5 swings (annotated and circled) and the fourth is notably a triangle. Wave 1 is simple in structure, wave 3 is complex and wave 5 is simple. Similarly wave 2 has a simple structure while wave 4 is complex. The alternating of simple with complex conforms to wave theory expectations.

The extended wave 3 relative to wave 1 implied that wave 5 should be relatively short and it was although there was no equality of wave 5 with wave 1 - which would have been a textbook example (wave 1 = 843 points whereas wave 5 = 1048 points). We will return to this chart momentarily with regard to price action from the March high to date.

When we view the long-term post-WWII USDJPY relationship and the monthly, weekly and daily Japanese yen futures charts since 1995 we think that most of the evidence stacks up in favor of the view that the dollar-yen has reached a critical, perhaps historical, juncture. Is there anything else that we need to consider that might provide some corroboration? We think there is.

When confronted with price action that suggests a major trend change might be in the works, one of the first things a technical analyst attempts is to establish is whether or not the price action has similarities with preceding action. If it does, then the likelihood is that the underlying trend is intact and that the market is just unreeling another corrective pattern. However, if price action looks different from that which has gone before, then the odds increase that the market is indeed shifting gears. Wave theory in particular spells out what differentiates corrective price action from primary trending action. If a major trend change is occurring in the Japanese yen then the wave sequence from the March 17, 2011 high at 129.57 should corroborate that. The pattern sequence should show a clear-cut 5 subswings within the first (#1) wave down. Additionally the fourth subswing should not overlap - i.e., pullback above the low of the first subswing.

Therefore, if we examine the yen daily bar chart from the March 17 spike top (circled point 5 on the chart immediately above) to the first significant low (boxed point 1?) at 116.97 on April 6, 2011 we should see 5 subswings if that leg has potential to be the start of a new primary downtrend phase. The daily bar chart does not appear to corroborate that expectation. However, let's look at a more detailed picture, a 90-minute intraday bar chart immediately below, which spans the same time period.

In contrast to the daily chart, the intraday picture does show 5 non-overlapping subswings (circled 1 - 5) down to point 1?. Thus, structural evidence exists to corroborate the idea that the collapse from the March 17 new all-time high was not corrective relative to uptrend development. Rather, the collapse is potentially the first wave in a totally new primary trend. [We did measure the subswings for possible percentage relationships (i.e., common Fibonacci ratios such as 38.2 and 61.8%) but only found that wave 4 retraced 38.4% of wave 3. Other wave comparisons did not bear out any relationships.]

Let's return to the daily continuation chart on page 4 in an attempt to get a handle on what the market is likely to do in the immediate future. Given the 5-subswing makeup of the March-April decline, for the moment at least, we must assume that wave 1? is either

1. the first of a new primary sequence down or
2. only the initial A-swing of a larger A-B-C corrective pattern relative to the up phase that culminated at the March high.

In both alternatives, the rally from the April 6th low at 116.97 is corrective. In that context it could be a #2 wave or a B-swing. A Fibonacci-related 61.8% retracement of wave 1? is at 124.75 (annotated). The high to date of the rally is 125.70 on May 5 but the high close has been 124.68. After the May 5 high the market put in 3 consecutive daily highs between 124.70 and 124.79. Obviously, there was significant resistance evident around the 61.8% retracement. Thus, market action to date is reason to think that a retracement of the March-April break has been completed, that the March blow-off high has thus been successfully tested and that weakness throughout the latter part of May is the start of a new down leg.

However, we think there may be another probable alternative. First, the series of overlapping downswings during May appear to us to be more likely a consolidation of the April rally to the 61.8% retracement area. If that is true, then the market is going to generate a leg up above its May 5th high at 125.70. Second, the daily stochastic turned up from below its 20 level on May 25 and the market put in 2 days of respectable price gains. That momentum condition implies a steady-to-higher price bias in the next 7 - 10 sessions - say out to mid-June. Third, referring back to the weekly continuation chart, price relative to its 40-week moving average plus the rising weekly stochastic impart an underlying intermediate-term upside price bias. Therefore, we think that the rally from the April low could be further elaborated on before prices succumb to selling pressure that will be sufficient to turn the short-term picture lower. In that case, prices could move up to the 78.6% retracement of the March-April decline (annotated at 126.87), basis the nearby CME futures. We will stand by that expectation barring aggressive price weakness below 121.00. If that occurs then the market should be vulnerable to new lows below 116.97.

To summarize our views, one interpretation of the post-World War II secular wave structure of the U.S. dollar/Japanese yen relationship suggests that the days of yen strength are near an end. Recent market action in the U.S. traded yen futures market at new unsustained highs had the characteristics of a blow-off terminal top.

However, it would be unrealistically naïve to expect that a trend that has endured for 61 years would be reversed in the 10 weeks of price action that has followed the March 2011 new all-time futures high. Given the extensive chart analysis above, we think that the intermediate-term picture, evidenced by weekly chart price and momentum factors, is a major piece of evidence that has failed to confirm downside potential.

In conclusion, the seeds for a major sea change in the JPYUSD have been sown. Whether or not they will grow to fruition should be determined by price action throughout the remainder of 2011. We expect the CME futures high of March 17th at 129.57 to be more fully tested during June - July before prices start to show sustained downside vulnerability. We would need to see yet again new historic highs above 129.57 to abandon this view.

[1] Data sources: CRB DataCenter; Reuters DataLink
[2] Chart sourced from public website - www.futuresource.com

Note: Some closing price levels may reflect either the CME exchange's official session settlement or the approximate last sale of the Globex trading session, i.e., 4:00 PM U.S. Central Time.

Charts constructed with Omega Research SuperCharts