Consider the USD-JPY

 | Aug 25, 2011 | 1:30 PM EDT
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After falling to an all-time low on Aug. 19, the U.S. dollar finally appears to be gaining some traction against the Japanese yen. I'm not one to go against the grain and fight trends, but this currency trade could be setting up as the mother of all reversals.

First a bit of historical perspective; the Japanese yen hasn't been this strong against the greenback, ever. To read a spot currency chart, look at the first member of the currency pair (USD-JPY), which in this case is the U.S. dollar. When the chart goes up, the dollar is rising against the yen. We could also say that when the chart goes down, the yen is rising against the dollar.

The first chart depicts the downward trend of the dollar against the yen, a massive move that has been in effect for decades. Within that move we see a huge descending triangle. Why on earth would anyone want to fight against this move? Just remember that the lower this currency pair trades, the harder it becomes for Sony (SNE), Toyota (TM) and other Japanese exporters to turn a profit.

Source: TradeStation

The arrow on the chart above points to the previous low of the dollar vs. the yen, which was set back in 1995 at 81.12. Last week, it reached 75.94, which was a new all-time low. So where is the reversal? Why on earth would I want to buy this?

It's well known that Japanese officials will intervene in the currency markets to protect the interests of their big exporters. The primary focus of these operations is Finance Minister Yoshihiko Noda, whose every utterance on the yen is scrutinized as closely by currency traders as any speech by Ben Bernanke is here in the U.S.

The daily chart depicts the intervention of March 17, which immediately followed the tragic earthquake and ensuing tsunamis. The March 17 intervention was coordinated and carried out by a variety of countries along with Japan. The most recent intervention occurred on Aug. 4, and was carried out unilaterally by Japan. As you can see, the effect was short-lived.

Source: TradeStation

But to focus only on intervention would be to miss the point as there are a variety of things going on in Japan right now that could lead to a reversal without the aid of intervention. Even as I write, the USD-JPY currency pair is sneakily creeping to a two-week high, so I'm long USD-JPY with a stop under 76.00. USD-JPY will have to hit another all-time low in order to take me out of this trade.

 It's nice to know that if this move does go against you, the Bank of Japan and the Ministry of Finance might come charging in to bail you out (emphasis on the word might -- there are no guarantees).

Source: TradeStation

What if you don't want to open up a currency account and trade spot forex? There are plenty of options in the world of ETFs and CurrencyShares Japanese Yen (FXY) is my preferred alternative. 

Just remember that currencies are trading 24 hours per day in the cash market, so even if you're trading the ETF, it's not a bad idea to look at the spot chart. The FXY chart tends to have large gaps because the underlying instrument trades 24 hours per day, while the ETF does not.

Also, the FXY chart moves in the opposite direction of the spot chart; a move higher represents yen strength. So, while a spot currency trader would go long USD-JPY to try to catch this reversal, an ETF trader would short FXY to do the same. The hourly chart does look toppy!

Source: TradeStation

Right now, I'm sure some folks believe the yen is moving because of measures announced this week by Noda (including a $100 billion facility to help companies deal with the strong yen), but those measures are widely perceived as surrender -- an inability to otherwise deal with yen strength.

I'm sure others believe it has something to do with the Moody's credit downgrade, from AA2 to AA3, of Japan's sovereign debt. Or perhaps the yen is moving because of the fact that Prime Minister Naoto Kan just announced that he will soon step down, possibly next week -- will Noda take his place?.

But the technical trader isn't focused on the reasons why, and doesn't fall in love with what he thinks he knows about a stock or a currency (as I mentioned in Tuesday's article Don't Fall in Love). Hang on, because If USD/JPY breaks 77.20, we could be in for a heck of a ride.

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