Major Trend Sets Up USD/JPY Trade

07/21/2011 6:00 am EST

Focus: FOREX

Weak fundamentals and a long-standing technical bias point to continued dollar weakness against the Japanese yen, and traders can capitalize using this favorable risk/reward trade idea.

The US dollar/Japanese yen (USD/JPY) currency pair has seen a 400-pip price range for the majority of the trading year between 80.00 and 84.00. However, the pair has recently sprung to life, looking to continue its four-year downtrend from the May 2007 high at 124.13.

Over the last three months, price has steadily created lower highs and lower lows, preparing us for a resumption of our larger directional bias.

Fundamentally, the United States continues to be viewed as weak. Holding over $14 trillion in public debt, the US dollar dilemma continues making the currency a speculative target. As politicians stateside continue to debate and argue over debt ceilings and future quantitative easing, we will look for this trend to continue.

chart
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Moving to a four-hour chart, we can see price consolidating at the bottom of our previous leg down in a triangle formation. Resistance is found by connecting the previous highs on July 12 (79.85) and July 19 (79.13).

Support is being held up from the lowest low displayed as wicks on July 12 (78.45) and July 20 (78.71). Traders have two options: Either wait for price to trade up and become overbought near resistance to enter with the broader trend, or trade a breakout of established support.

chart
Click to Enlarge

My preference is to sell the USD/JPY against resistance at the top of our consolidating triangle near 79.20. Stops should be placed over the pattern high above the 79.90 handle. Limits should be set at .7780 or better, setting up for a minimum return of 140 pips for a clear 1:2 risk/reward ratio.

See video: Make Sure Risk/Reward Is on Your Side

Alternative scenarios include price immediately moving below support for a larger breakout below 78.40.

By Walker England, instructor, DailyFX.com

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