Big Reversal Ahead for USDJPY (UUP, FXY, SPY)

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Abigail F. Doolittle: The charts would seem to say so but before looking at the charts, let’s talk about timing.  It is ambiguous at best with the stage set for this reversal to start as early as today, but more likely it will come at some point in the first or even the second quarter of next year and so this is meant as an early heads up with the potential for a near-term surprise that is supported, potentially, by its daily chart as shown below.

Specifically, USDJPY’s (NYSEARCA:UUP, NYSEARCA:FXY) daily chart is showing several bullish technical aspects including (1) a probably bullish Ascending Triangle in green that is often seen at big bottoms, (2) a possible Diamond Bottom in purple, (3) a Symmetrical Triangle in blue that appears to be more bullish than not, and, (4) the fact that USDJPY (NYSEARCA:UUP, NYSEARCA:FXY) has risen up and out of that bearish Descending Trend Channel that had its claws on it for nearly 8 months.

It is the Ascending Triangle in green that is the main pattern to focus on with the Diamond Bottom and Triangle patterns there to help fulfill its 84.20 target with confirmation coming if USDJPY rises above 80.24 on the Diamond Bottom that confirms at 79.51 and carries a target of 83.50.

USDJPY’s (NYSEARCA:UUP, NYSEARCA:FXY) daily chart is turning bullish, then,  and it should be considered bullish if USDJPY (NYSEARCA:UUP, NYSEARCA:FXY) rises above 79.51 and then 80.24 with a potential move above each level signalling that USDJPY is likely to find the Ascending Triangle’s target of 84.20 in the not-so-distant future.  Its daily chart remains neutral, however, below those levels and bearish if USJPY were to drop below 75.55 and something that could come close to occuring on the Symmetrical Triangle turning toward its downside target of 76.40 rather than its upside target of 79.20.

USDJPY’s daily chart, though, is hardly the reason for thinking USDJPY is about to reverse its 30-year downtrend.  No, such a call is a reflection of what is happening in USDJPY’s monthly chart as shown below.

Specifically, USDJPY’s monthly chart is showing a behemoth and bullish Falling Wedge and one that appears to be pretty close to the potential apex that could send it higher and significantly higher and, in fact, so much higher it nearly sounds absurd to say, but the target on this pattern is 124 and a level last seen in June 2007.

It confirms first at 81.48 but safely at 85.54 and it is that latter level that needs to be seen to take this pattern and that target that offers the potential for nearly 45% upside from its level of confirmation.

In turn, it seems to be a pattern worth keeping an eye on along with those mentioned in the daily charts because it will be the success or failure of that Ascending Triangle that will determine whether the last few months will, in fact, serve as an apex for its Falling Wedge.

Relative to a fundamental view of what this pattern represents beyond dollar strength is hard to say, but it may be one of the few charts out there to not suggest a eurozone implosion on the come.

The reason for writing this is because in the longer-term monthly chart on the following page, USDJPY (NYSEARCA:UUP, NYSEARCA:FXY) dropped significantly during the first part of the financial crisis in 2008 even as the dollar shot up, the tragic events of 2001 and the Long Term Capital Management crisis of 1999 with the latter two not being strong comparisons.

In other words, even though the dollar is the world’s reserve currency, investors seem to view the yen as the strong safe haven currency in times of true crisis.  Should this possible dynamic apply to the future as would seem to make sense as the Falling Wedge fulfills up, it supports the idea that the dollar is going to rise on some blend of its own merits and what is happening in the eurozone but that the latter will not implode into a crisis of the magnitude of 2008.

This is one of the only charts to make such a suggestion and maybe this means the yen’s perceived safety is dropping.

Or maybe it means that the Falling Wedge above in blue puts in a much deeper apex as occurred back in 1995 or maybe the risk asset charts that suggest a big drop could be ahead choose the bullish pattern possibilities rather than the bearish.

This latter scenario, though, would be challenging at best considering that the dollar index itself is set to rise and something that would seem to push equities and, almost certainly, commodities down unless the US economy is about to become so healthy overnight that stocks rise on corporate earnings rather than a weak dollar.

Such a topic is a discussion for another time, probably many more times, while this time is about the strong possibility that USDJPY may start to stage the much-awaited reversal of its long-term downtrend.

Might there be another BOJ intervention or two involved as occurred at the end of October and in August and March of this year and August of 2010?  Maybe but with the exception of this past March and an intervention that was more an intervention of the world’s central banks due to the tragic events to take place in Japan at that time, the other interventions have had little lasting impact with the possible exception of the one in October with its effects appearing to be potentially positive right now.

More likely, though, it seems that the USDJPY’s potential reversal of its long-term downtrend will be less about the yen and more about the dollar staging some sort of a recovery of its own.

Sam’s Stash, Gold and the S&P:

This section asked for the month off and maybe that starts next week, but this week it seems worth pointing to one of those extreme risk asset charts that shows a wildly bullish pattern or a very bearish pattern with the latter looking like the stronger aspect after recent weeks and perhaps a reversal of the bull pattern looking better back in October.

On the following page, you will see the three-year weekly chart of the S&P (NYSEARCA:SPY) that was shown in last night’s Puppet Masters of the World – Unite!  due to the fact that there seems something mistimed and wasted about Wednesday’s swap lines move that is showing in the index’s chart.

Specifically, it seems that the index is trading in what has become a sick Inverse Head and Shoulders pattern that may encourage a longer-term Head and Shoulders pattern to fulfill.

The reason the IHS is not looking so hot right now is due to the weight of its right shoulder along with its ridiculous but safe neckline at 1350 due to the eurozone’s late October vision for a plan.

Let’s hope, however, that Mr. Bernanke and the other central bankers get right what is probably nearly impossible to get right at this point and this means the IHS pattern confirms and takes the S&P (NYSEARCA:SPY) nearly 20% higher to its 1575 target.  On the other hand, maybe it will be that Head and Shoulders pattern that wins and something that could just be considered a Rounding Top with safe confirmation at 1075 for a target of 775 and one that suggests a nearly 40% drop from current levels.

In my view, neither pattern should be counted on until safe confirmation comes one way or another considering that this extreme chart is born of the S&P’s (NYSEARCA:SPY) two highly volatile sideways trends of this year that are probably capable of delivering a real surprise when the fewest people are expecting it.

Thank you for taking the time to read this week’s piece and have a great weekend.

Courtesy of Abigail F. Doolittle, Peak Theories Research