Great Graphic: Symmetrical Triangle in Dollar-Yen

Japan's markets re-open tomorrow.  Since their markets closed on September 18, the US 10-year Treasury yield has eased 5 bp and the S&P 500 is off about 3%.  Both of these forces point to a lower dollar against the yen. 

Yet the dollar is virtually unchanged against the yen, straddling the JPY120 level.   In the options market, dollar calls are trading at a deeper discount to dollar puts (3-month 25-delta) since the Japanese holiday began. 

In the spot market the dollar has spent the last several weeks tracing out a symmetrical triangle pattern.  This pattern is often regarded as a continuation pattern.  Before the pattern began, the dollar had fallen from around JPY124.50 to about JPY116.20. 

In this Great Graphic, created on Bloomberg, one can see the symmetrical triangle pattern.  It is like a spring coiling.    Broadly speaking, technical analysis makes appropriately three points about such patterns.  

First, about 75% of the time there are continuation patterns.  A quarter of the time they are reversal patterns.  Second, ideally the break of the pattern takes place 1/2-3/4 through the time-span.  Third, there are frequently false breaks out of the pattern.  

In terms of time, the dollar is just past the middle of the pattern.  In terms of the price objective, assuming a continuation pattern, the target is a re-test on the spike low seen in late-August near JPY116.20.  If it is a less common reversal pattern, the objective is near JPY122.50. 

Other technical indicators are not generating a clear signal.  The MACDs have turned higher earlier this month but appears to be leveling off.  The RSI is neutral.   The slow stochastics are rolling over to the downside. 

Although the odds do not favor it, I have a slight bias toward an upside break on fundamental grounds.   Specifically, a negative core CPI reading from Japan will likely fan expectations of more QE, while Yellen's speech tomorrow is likely to reiterate that 13 of 17 Fed officials still see a hike before the end of the year as appropriate.   In addition, there has been a massive short squeeze in the yen that has seen the gross short speculative position more than halved since mid-August.  At 63.2k contracts, the gross short position is among the smallest since late-2012.  The smallest was in late April when the gross speculative short position was 54.2k contracts. 

disclaimer