Jay Norris'  Instablog

If there is one thing I have learned about markets after 30 years it is the importance of pattern recognition. Not complicated patterns though; in fact the more simple the better. I'm talking about the pattern of highs and lows and the length or depth of the retracements, which tell me whether a market is in a bull stance or a bear stance. This information taken over different slices of time is very valuable. I also like seasonal patterns. As a fisherman and a gardener I know there is no denying the power of seasonal change. As a trader I know that seasonal tendencies for markets are also powerful, and the one that has my attention right know is in the Japanese yen. The 35-year seasonal tells us that the best time of the year to buy the yen, i.e.: sell USDJPY, is right now. See Figure 1.

Figure 1. Yen Future 35-year Seasonal

What is especially interesting about this chart and the yen in general is the public is currently overwhelmingly bearish on the yen and bullish on USDJPY. If we take bullish/bearish open interest as a contrarian indicator we would have to consider that the timing for being long USDJPY at this time is not so good.

Figure 2. From forexblog.oanda.com

In Figure 2 we see a copy of OANDA's open position ratio found on their MarketPulse FX blog where we see that nearly 77% of their open USDJPY trades are long; this at a time when the seasonal is telling us the opposite. Yet given the historically low levels USDJPY is trading at, and Japan's penchant for intervention at these levels, trying to take the other side of the crowd, in favor of the seasonal, doesn't seem like such a good idea either. And in my trading plan I prefer selling rallies in down-trends and buying dips in uptrends. Neither condition from my perspective exists in the yen.

What about the other Yen Pairs?

I have been a little confused that AUDJPY has not been a bit stronger in this most recent run up. For example AUDUSD, along with the S&P 500, which the Aussie pairs are tightly correlated to, both shifted their secondary patterns higher at the end of July. The secondary pattern is anywhere from 1-month to 8-months. AUDJPY however has not, the secondary pattern here is still lower - see Figure3.

(click to enlarge)
Figure 3. Daily AUDJPY Chart

As long as price continues to close below that orange line the secondary pattern remains down. This is good information, however of little use yet given the Day to Day, and Micro patterns are still bullish - last I looked even the Super-micro pattern is higher, which means we still like buy set-ups and signals. However, a micro shift in AUDJPY would turn the majority of those before mentioned patterns lower, and that would be an environment in favor of the sell side -- selling a rally in a down-trend --and a way to get a little skin in the game to fade the long USDJPY crowd and play the yen seasonal.

Jay Norris is Director of Education at Trading University

Trading is indeed a risky endeavor and not suitable for all investors!

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.