As we all know, the goal of trading is to make money. But sometimes traders think like analysts, and being right about a market's direction overshadows the primary directive -- making money. So when the stock market gives us fits and starts, and crosscurrents like emerging markets and the Federal Reserve make equities treacherous, it makes sense to look for other opportunities.#-ad_banner-#
As they say, there is always a bull market somewhere, and right now, it looks as if the Japanese yen is in the early stages of one. And for those who cannot or prefer not to trade spot currencies or futures, the CurrencyShares Japanese Yen Trust (NYSE: FXY) provides a liquid way to play.
I will leave the fundamentals of the Japanese economy to others to analyze. From a charting point of view, there is plenty to like, and given the yen's status as a safe-haven currency, the turmoil in emerging markets and volatility domestically add additional luster.
The analysis is rather simple. After a two-year bear market in which FXY fell from $130 to a low of $92.75 at the end of last year, technical indicators are looking up.
For example, on the weekly chart, the Relative Strength Index (RSI) made a higher low in December even as prices made a lower low. This divergence between indicator and price action is usually a signal that that a bottom is being put in place. In other words, supply is easing and the market is waiting for a spark to kick up demand. As we learned in economics class, low supply and rising demand pushes prices higher.
Let's bring this closer to home with shorter-term daily charts. Here, too, we see RSI rising before prices did. Trading over the past two months has left a base, or trading range, in place. We can even make the argument that it formed an inverted head-and-shoulders pattern, which does indeed suggest that a bottom has been made.
I caution that a two-month pattern is usually not enough to reverse a two-year trend, at least not without additional testing or pausing. But every journey has to start somewhere, and given that short-term resistance has been breached, the odds that there is more to come, at least in the short term, are good.
Assuming the pattern is an inverted head-and-shoulders, the neckline was pierced last week, not coincidently when the U.S. and emerging stock markets began to tumble. And while the 50-day moving average is more often associated with stocks than currencies, it too was broken to the upside at the same time.
A simple measuring technique of projecting the pattern height up from the breakout yields a target of roughly $97.50. That is where the 200-day moving average will likely be late next month, but more importantly, that is where there is resistance from the mid-2013 congestion zone.
If the FXY can break through that level, then there would be plenty of room before reaching the next resistance area. However, as mentioned, we cannot expect a bull market based on a two-month pattern, so expect some backing-and-filling if and when $97.50 is reached.
A 3% gain may seem small, but currencies do not move as fast as stocks, and for the current environment, that is a good thing. If the trade works, keep in mind that trends in currencies can persist for months, if not years. Slow and steady.
Action to Take -->
-- Buy FXY at the market price
-- Set stop-loss at $94.10
-- Set initial price target at $97.50 for a potential 3% gain in four weeks
This article originally appeared on ProfitableTrading.com:
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