Unless you’re comfortable executing an options straddle with USDJPY (the yen’s value to the dollar) or FXY (CurrencyShares Japanese Yen), I think you’re better off not trading the yen in either direction for the time being.
I figured it was timely to write about this since USDJPY has been trading in a narrow band since late January. Tight ranges are generally followed by pretty big moves one way or the other and that makes this a tempting market to get ready to trade. I offer you two reasons why I think that’s a bad idea.
One, the long side of the market is unattractive due to the proximity of two key layers of technical resistance. The currency pair hasn’t been able to sustain an advance past chart resistance at 101.67, based on key lows in January 2005 and late 1999. And price faces trendline resistance drawn off the highs in 1998 and 2007.
Two, going short would mean trading against the direction of what has been a very strong uptrend since late 2012. That’s unwise. I’ve lost money enough times by going short just before the last breath of an uptrend to know not to do it again. Granted, monthly momentum is overbought (see RSI averages at the bottom of the chart) and that’s a big warning that an important intermediate-term trend change is probably imminent. But it’s not unheard of – or even uncommon – for markets to shoot higher amid overbought conditions just before peaking.
If you are able to do a straddle, this market is a great candidate given the low volatility this year. I’d just suggest that you don’t stick around for long in the case of a break higher since price faces trendline resistance.
Good trading, everyone.
