Flags flying as USD/JPY breaks away from pennant pattern!

Regular readers of my market analysis, and attendees at my online forex training webinars, will have seen me refer to the weekly chart for the USD/JPY many times, highlighting the the development of an important candle pattern, offering forex traders, excellent potential trading opportunities. This is shown on the chart with the yellow dotted lines.

The candle pattern in question is the pennant, and the only question with such a strong pattern is not if, but when. Well the ‘when’ has now finally arrived, with the USD/JPY breaking to the upside, surging through the 100 level, as the pair finally emerging from an extended phase of price congestion.

For currency options traders, this is a great pattern, offering the possibility of using a directionless trading strategy, such as a long straddle. The only question is then one of timing, the option holders biggest enemy. Get the timing right, and the stategy makes money, irrespective of the direction. Get the timing wrong, and the wasting aspect of time increases the prospect of a losing strategy. The alternative ,of course, is simply to wait and be patient, and for those forex traders taking this approach, while the wait has been long, it looks as though it is being rewarded.

Whilst the initial breakout two weeks ago, was on relatively low volume and certainly not excessive, the  last weeks’ volumes have been increasing nicely as the pair climbed through the 101 level and is now preparing to test the highs of May in the 104 region. Below, as you would expect, we now have a deep area of price support in place, as shown by the Volume At Price histogram on the left hand side of the chart, which extends from 98 through to 100 and just beyond, thus providing an excellent platform of support.

Moving forward, provided we see volume continue to build as we move away from the pennant pattern, then we should see the pair continue higher in the longer term, and any clearance of the 104 level, will then open the way to further sustained bullish momentum for the pair in Q1 of 2014.

By Anna Coulling