Yen (JYH5), Jan. 29, 2015
General Assessment: The BOJ has grown its balance sheet to some 60% of GDP and continues to print Yen at a rate of 80 trillion per year. Those numbers are truly massive and completely unprecedented in modern finance, and it would seem completely insane to actually want to buy yen in such an environment. Which is precisely why just about everyone who can, has already sold it. Speculators are short, importers are hedged, and now even domestic investors, from pension funds to insurance companies to individuals, are aggressively “diversifying” into foreign (non-Japanese) assets. So at this point it appears that the only player out there who still has Yen to sell is the BOJ itself, but at a pace of 80 trillion yen per year it really doesn’t need much company, does it? The main risk at this point is that some of these foreign economies and asset markets begin to underperform and Japanese investors start to repatriate assets – kind of a flight to quality, if you will. Given the speculative positioning in Yen, such an event could really squeeze shorts and cause a quick, if temporary, spike in Yen. Outside of this positioning imbalance, however, there don’t appear many strong fundamental reasons for buying Yen, so any potential longs here should be treated as purely tactical, speculative plays.
The charts right now show the Yen carving out a triangle or pennant consolidation from its recent spike above 120 in a pattern that almost looks like a smaller version of its mid-2013 consolidation after the Yen first breached the 100 level. Should this current consolidation also resolve itself in a continuation of its prior trend it should seek 125 to 127 next. Elliot wave adherents will note that if wave 5 equals wave 1 at 50% of wave 3, it should carry towards the 126.50 area next, where they may seek to take some profits and a speculator may seek to establish a tactical long. Traders should also note, however, that there is some translation error between spot levels and futures, so potential targets in JYH5 could be a bit looser, perhaps between 78.30 and 77.30, where waves 1 and 5 equal 61.8% of wave 3 (see charts).
Preferred Strategy: Sell 85 for triangle break targeting low/mid 78s where a cover and reverse may provide a good tactical counter-trend opportunity. Given the large speculative short base, remain cautious with any tactical shorts and use trailing stops to protect profits from an exogenous shock or flight-to-quality event.
Conviction Level: Medium
Weekly Chart:
Daily Chart: 
Price Trend: Strong Downward
Momentum: Steady
Investor Positioning: Very Short
Investor Sentiment: Bearish
Notes:
Price Trend is based on the prevailing slope of shorter and longer term moving averages and will be expressed as either “Strong Downward”, “Moderate Downward”, “Sideways”, “Moderate Upward”, or “Strong Upward”.
Momentum is based on the change in the slope of shorter and longer term moving averages, as well as measurements of the Relative Strength Index (RSI) and will be expressed as “Accelerating”, “Steady”, or “Decelerating”.
Investor Positioning is based on the CFTC Commitment of Traders reports and various other investor surveys where applicable, and will be expressed as “Very Short”, “Somewhat Short”, “Flat”, “Somewhat Long”, or “Very Long”.
Investor Sentiment is based on DSI surveys and various other investor surveys where applicable, and will be expressed as “Very Bearish”, “Somewhat Bearish”, “Neutral”, “Somewhat Bullish” or “Very Bullish”.
General Assessment, Preferred Strategy, and Conviction Level are the author’s opinion alone, shared for informational purposes only, and should never be construed as investment advice or counsel
