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Oil, Yen and the Prospect of Fresh Trends

Oil, Yen and the Prospect of Fresh Trends

2016-09-29 13:00:00
James Stanley, Strategist
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Talking Points:

- US Dollar price action has been rather benign of late, and this can be a fantastic opportunity to investigate longer-term setups, especially technical setups, in the effort of getting in front of the next ‘big moves.’

- Below we dive into two key markets by investigating multiple time frames of each.

- If you’re looking for trading ideas, check out our Trading Guides.

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In yesterday’s article, we discussed Price Action Setups for a Meandering Dollar after last week’s Federal Reserve announcement failed to inspire any form of strong trend in the Greenback. But as we noted, this week’s schedule is full of Fedspeak, and this could certainly stoke some element of motivation across risk markets, so traders still need to be careful of getting caught off-guard.

But interestingly, as US Dollar price action has been rather benign over the past couple of days, some interesting technical developments have shown up in key markets like Oil and the Japanese Yen. Each of these markets has the ability to carry global connotations, and for much of the year markets have been trying to call tops and/or bottoms in the effort of catching the next ‘big move.’ Below, we look at longer-term setups in each before dialing in on the shorter-term charts.

Has Oil Topped (Again)?

The down-trend in Oil that kicked off mid-2014 was an aggressive move that lasted for almost 20 full months. And while there were periods of sideways or bullish price action in this move, the majority of the selling took place in three phases; the last of which ended on the morning of February 11th. All in all this move saw Oil prices fall from above $107 to below $27 in this short period of time, accounting for a near -75% drawdown in Oil prices.

As Chris Vecchio and I wrote in January of this year, the risk-reward on the short side of Oil was simply unattractive any longer, especially once prices fell below $30/brl. Since then Oil prices have rocketed higher by nearly 100% until hitting a fresh short-term high at $51.64 in early-June. But since then price action has congested with a down-side bias, setting up what could be a short-term top ahead of another move lower. On the chart below, we’re looking at a projected trend-line that runs directly into this potential topping indication. This trend-line originates from the low in December of 1998, and is connected to the low of January 2009; the projection of which runs directly into a quick shot of swing-support in early 2015, followed by resistance from this June’s swing-high.

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

Since that recent high in Oil prices was set in June of this year, price action has been in the process of making continually lower-highs with swings coming-in successively-lower. For this long-term trend-line projection to ‘work,’ prices would need to stay below the June high at $51.64, and as long as that is the case the prospect of a ‘bigger picture’ breakdown is still very much on the table.

On the chart below, we’re looking at the daily setup in Oil prices, with the long-term trend-line projection highlighted with the lower-highs that printed after this level came into play.

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

And taking this just a step further, on the chart below we’re looking at the 1-hour setup in Oil prices, with prior lower-highs pointed out. These lower-highs can become usable for those looking to take a near-term bearish setup in Oil. For those that want to be a bit more conservative, instead electing to let the move ‘get going’ before trying to get short, the near-term support level noted above at $42.89 could become a litmus for such a play, with traders waiting for that break of support to indicate the potential for continuation of the move-lower.

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

Is the Yen Drive Done?

Another market that’s working with critical longer-term levels is the Japanese Yen. We’ve discussed the macro context behind this market numerous times throughout the month as we approached the September BoJ meeting, and keeping matters fairly simple: The BoJ may do something more to try to stimulate their economy, but the past couple of meetings have left investors wanting, so that hope for more appears to be diminishing, and this can be seen in the technical setup as USD/JPY has snuggled closer and closer to the vaulted parity level at ¥100.00.

If you’re looking for setups in GBP/JPY or EUR/JPY, we discussed both of those in technical articles yesterday; and if you’d like to read those you’re more than welcome to by clicking on the link below. In this article, we’ll focus on the larger macro market of USD/JPY.

GBP/JPY Technical Analysis: Three Strikes of Support

EUR/JPY Technical Analysis: Another Test of Confluent Support

On the chart below, we’re looking at the monthly setup in USD/JPY with another long-term trend-line plotted. This trend-line originates from the high in August of 1998, with point of connection in June of 2007. But what’s interesting about this trend-line isn’t what happened ten years ago, it’s what’s been happening over the past four months; as price action has been finding incrementally higher-lows after first intersecting with this level in June shortly after the Brexit referendum.

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

The above chart can be a fairly clean descriptor of the current macroeconomic situation in Japan. After decades of deflation driven by Yen strength impacting exporters’ margins, ‘Abenomics’ took the world by storm in Q3/Q4 of 2012. That’s when USD/JPY came to life to, eventually, climb back above that trend-line. But more recently, this market has reversed with aggression as global economic risk has continued to rise. The top in USD/JPY syncs with the approximate period with which China ‘revaluated’ the Yuan peg away from just USD and towards the SDR basket that they’re currently using. The Yen has been under constant pressure since last August when this was announced.

But that trend-line isn’t the only possible support that USD/JPY may have in this region. Drawing a Fibonacci retracement around the ‘Abe-move’ shows a 50% level at 100.71; and this has assisted with setting near-term support in the pair.

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

And if we dial in even further, we can notice the series of higher-lows that’s printed in USD/JPY since that longer-term trend-line projection came into play in June. We’ve added an upward sloping trend-line to help highlight these higher-lows, and we’ve set this up in Green in order to differentiate this from the longer-term, bearish trend-line that we’ve been looking at previously:

Oil, Yen and the Prospect of Fresh Trends

Chart prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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