BUY USDJPY @106.5 or @107.0 - SL @105 - TP @109-11 based on:
YEN's historical most important support level - The 105.5 Key level will more than likely hold as it has many times before
- At 105.5 there are 3 significant UNSUCCESSFUL tests of the level over the last 3 years thus it is a great entry point. Also another plus is if you look at the monthly chart you will notice 105.5 is the 2nd most important level in Yen's 20y+ history, the 1st most important/tested is the 101 level.
- Further, over the last 3 years the level has been tested 4 times in total and it only broke once when USDJPY rose to 127 so that means LONG at this level has a 75% chance of success (based on the simple discrete math).
- Plus, around 105.5 at 106 and 106.5 these also provide "mini" strong support levels which i think are great, low risk entry points for long positions.
Normal Distribution and High Price Standard Deviation Volatility
- as you can see the weekly bar has closed below the 5 year -3SD (and -2SD 2.5year) once before, by the red bar 5 weeks ago which was also at the 105.5 support level- at which point USDJPY0.02% rallied back up to 111.5 from 105.5 after closing below the -3SD and -2SD line and on the 105.5 so we could see topside like this again.
- in addition to this, it is worth noting that the 5y -3SD blue line that was violated but rejected 5 weeks ago and is being tested again, based on normal distribution theory, says that prices touching this line have a 99.5% probability of reverting BACK UP towards the mean at 122.5. The -2SD 2.5year line that was also violated has a 95% probability of retracing up towards the mean at 126.
Historical and implied volatility at all time highs - a reversal
- Historical volatility across the board (5,10,20,30,60) is trading at all time high levels now and at some point these levels have to come down, investors cant keep pushing vols higher, which in turn, means selling of UJ must come to an end soon and we should see an upward recovery run.
- The same is true about Implied vols which are trading at 15.75% which is in the (upper) 90th percentile of the last 2.5 years of days, meaning implied vols 90% of the time have been lower than this - thus a reversal is more likely at these levels. HV is likely in the 90%tile or greater also - Usually a sell-off in volatility precedes buying of UJ.
1. The obvious risk of the Long UJ play are that the 105.5 level doesn't hold, in which case i believe the long squeeze caused, as a result of all long SLs being hit causing a cascade of selling could take us down to 102/3 - however this is easily avoided by keeping tight stops at 104.5-`105 dependent on your risk appetite.
- even with a 150pip SL it still returns us 3x returns with a TP target of 111+
2. The markets may trade risk off in the coming weeks as the macroeconomic envrionment is filled with uncertainty e.g. FOMC, BOJ and UK EU Referendum, in which these events are compounded by the fact that risk markets (spx etc) are currently trading at all time highs, making a reversal in their direction and risk-off tone more likely. Furthermore other risk-off assets such as Gold and Bonds are trading well.
All of which may combine into a strong risk off environment that fuels the JPY follow the bullish trend with its counterparts (bonds and gold) and enabling UJ to push past the 105 strong hold.
- However, these issues are all displaced by a tight SL as advised at 104.9 (to benefit from the 105 key lvl supporrt potential)
Comment
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Also I forgot to add - I fundamentally like holding UJ due to the FOMC and BOJ Monetary Policy Divergences...
At the moment the FOMC is into its hiking phase where it is increasing the interest rate, which in turn, increases $ usd demand (hot money seeks the highest interest rate). The hiking phase is also warranted IMO as the US economy is nearing full employment ( as many key Fed memebers (e.g. Kaplan) keep ephasising). Also inflation is nearing their target.
On the other hand, BOJ is undeniably easing, since their economy has weak inflation (-0.4% last print) even after years of easing, so my expectation on the BOJ tone for the coming future is dovish.. such policy decreases the value of the JPY as by QE and low rates, it encourages the money supply to increase.
So to summarise, we have the FOMC USD hiking, increasing $ demand, and on the other hand we have BOJ easing, and increasing JPY supply.
Increased dollar demand = BUY dollars, and increased JPY supply = SELL JPY; hence why BUY USDJPY makes so much sense fundamentally also.
This is a most excellent analysis. It is one I can use to pick apart and fill in my knowledge base. I'm long USDJPY (because of the 200ma on WK and M). I didn't understand why the 60 pip drop,today. You describe why.
QuantumLogicTrading
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Im glad you found it helpful. Yen didnt actually drop 60pips today, it open-closed down only 15pips which i consider flat, but UJ did have a range of about 70pips (1.0650-107.200) so you are right there was a 2x downside skew.. But on the whole this week imo Y has traded relatively flat/ sideways with a slight downward bias.
My opinion for the sideways movement is that the bull/ bear arguments i mention above are currently trading close to equilibrium supply and demand, hence why UJ is finding it difficult to pick a trend up or down and make significant gains in either direction of the range. For example, i think that the event lead uncertainties coming up within the next 2wks (FOMC BOJ UK REF etc) are causing JPY safe haven investors to demand JPY and at the same time fundamental bulls (who are long UJ for the reasons i write above) are selling/ supply a similar amount to the risk averse bears.
So we are seeing yen supply and demand trade together. For UJ to start trending and holding onto its ranges, it needs a push in either the supply side or demand sides direction.
for example..
If FOMC hikes, BOJ is neutral and UK EU REF votes YES to leave EU, i am in no doubt that UJ will sell-off to 101 possibly, as this combination of events is the higest risk possible so everyone (including myself) would probably long JPY - so the demand side would win and UJ will trend down.
OR
If FOMC is Neutral, BOJ Eases and UK REF votes NO to leave EU (and in the run up to the 23rd polls are biased to this vote) - we should see the supplyside win, e.g. people will sell JPY as the environment isnt as risky and the bull reasons i mention above (especially the policy divergence) is emphasised further.
Hope this helps, ask if you have any more questions.
dead2live
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You are very generous. Yes. I will ask questions, but later after I have done an enormous amount of homework as your comments will not go to waste. Thank you seems insufficient!
QuantumLogicTrading
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Its my pleasure! Any other questions please ask.. i did some analysis on the upcoming UK referendum (likely to cause alot of market uncertainty) - you should check that out also if it is of interst!