The USD/JPY pair surged higher during the session on Wednesday, breaking the top of the shooting star from Tuesday. Normally, I consider this a very strong buy signal, but I am a bit concerned about going long at this point. Simply put, I believe that this market is way overbought at this point, and the parabolic move is probably going to come crashing back down.
This isn’t to say that I’m looking short this market, far from it. When I need to see is some type of pullback in order to take advantage of perceived “value” when it comes to the US dollar. I believe that the 105 level is in fact the “floor” in this market, and we will not break down below there.
A tale of two central banks.
It’s simple when it comes to this pair, as the central banks are diametrically opposed as far as what they are doing. In the United States, you have the Federal Reserve tightening its monetary policy by cutting back on quantitative easing. It’s not that we have seen tightened rates, it’s just that the market is trying to anticipate when that time comes. The Federal Reserve is buying less as far as the bond markets are concerned, and eventually that should drive interest rates higher. On the other side the Pacific, you have the Bank of Japan. They are still looking to add to quantitative easing, and therefore they want to continue to buy JGB’s, or Japanese Government Bonds. They want to drive the yields down and force the value of the Yen to drop against other currencies around the world to help their export markets.
I believe that they will in fact accomplish this, but we will have pullbacks from time to time. Pullbacks are buying opportunities, and this is the type of chart the gets a lot of new traders into trouble. It comes down to being patient enough to wait for that buying opportunity in order to do so. I have to sit on the sidelines and wait for a pullback with a supportive candle for a start buying this pair. I certainly have no interest in selling it, and I still believe that we are heading to the 110 level.
