Then Yen has been hammered over the past 2 months. Abenomics won again at the polls and traders have been pricing in continued money printing by the BOJ. All trends are clearly down, but there are signals forming that this selloff has priced in too much, too fast. Lets take a look at the setup.
Firstly, it must be noted that going back to 1993, over 6k trading periods, the historical price distribution odds over a 20Trading Day interval is 1:1. On a 70th Percentile basis, prices will advance .97cents, and retreat .95 cents.
However, the past 2 months has seen relentless selling, as the Yen has dropped a staggering 6.5cents in less than 40 Trading days. Going back to 1993, this price decline scores in the 90th percentile. While not a reversal signal by itself, it does show this leg of the decline is at a historical extreme.
This negative price action has turned our proprietary adaptive channels on a 9+23 week basis down - We call this a weekly "4down" signal. While this may excite bears, it shouldn't, as paradoxically we see statistical outperformance by the Yen when this condition is triggered. Odds improve from 1:1 to now 4:3 in bulls favor.
The next item of interest in the positioning of Commercial Traders this week:
Ranking Commercial Net Positioning, current net position scores a 100% on a 18m basis. As noted earlier, historical price odds are 1:1 going back to 1993, but now look when we have a NetComm 18m score of 99% or better:
The 70th percentile move over 20days is now 1.23cents up by (.56)cents down or 2.5:1 in bulls favor.
Lastly, on the charts we can see our Oscillator is not confirming the new lows in price, so momentum on the downside is waning.
Given current Commercial positioning and a extremely negative technical position we see Odds favoring a long bet here. Because price is continuing to fall, we need to see some sort of reversal before entering.
Looking at the above chart we see a perfect setup with a bearish pivot breakdown occuring right at 87.55. If we are correct and price is due to reverse, the first sign will be a invalidation or "headfake" of this breakdown - When price reverses off the lows and closes back above that pivot go long 1 unit.
You can hedge this with a at the money put, which will cost approx .94cents for 61 days of protection. Once price rallies 1cent to 88.50, sell a covered call 1 cent out of the money at 89.50.
You should get approx .45 cent for this so your cost of protection drops to half a cent, while you have 2 cents upside for R/R of 1.5:.5 or 3-1.
One last note - Currency desks have been trading Gold+Yen in a highly correlated manner this year. Both GC+JY topped on 9/8 and have been retreating since. They bottomed within 1 day of each other on July 10.
The Yen has been considerably weaker during this Wave lower, due to aforementioned Abe election triumph, so if it is due to bottom here shortly, this will remove one of Gold's headwinds in the coming months.
One also has to wonder, with Trump in Asia for 2 weeks, I'm certain he will be pressuring both China and Japan on their currency interventions, and this could mark the next leg lower for the US Dollar, and next wave higher in Gold.