As anticipated, we saw a big breakout in USD/JPY. It was to the upside after the Bank of Japan announced an emergency meeting for today. They will likely implement further quantitative easing measures to combat deflation. The effect is most likely to be a further yen negative unless the BOJ announces some very limited measures.

As noted earlier, 87.53 will be a key resistance level to break if we are to see a continued USD recovery.

A wedge pattern is set up in USD/JPY on the hourly chart.

This pattern usually signifies consolidation after a big move and that is exactly what we saw in this pair over the past week.

The wedge formed after a new 14-year low in the pair on Friday. In today’s trading it has consolidated in a tightening pattern as Japan’s non-intervention statements clashed with declining risk appetite.

Generally, a wedge pattern sets up a big move, normally in the same direction as the previous move. In this case, a break of the supporting trendline could initially target the 14-year low of 84.43.

The key level on a rebound will be 87.53, which is the 61.8% Fibonacci retracement of the down move. A break above that would open the way to a return to 89.19.

The bias has be toward more U.S. dollar weakness but if there was a time to see a big gap lower in the greenback it might have been today. Most charts were set up very bearishly for the dollar at the start of the session but buck held its ground.

On the other hand, USD/JPY was set up quite bullishly after the turnaround on Friday. That generated a massive reversal signal but the follow through has been lackluster.

What’s important to keep in mind is that Thursday and Friday trading came on low volume because of the U.S. holiday. Undoubtably, that created some confusion in the market and some mixed signals. In the next 24 hours, we should see some clairity.

We are seeing some textbook reversal patterns GBP/USD.

The culprit was Friday’s volatility. The extreme push lower followed by the higher close formed a hammer pattern on the daily chart.

What makes this chart so compelling is that it appears in USD/CAD, EUR/USD and AUD/USD as well as in oil and gold.

The short-term case is also a textbook pattern, this time it’s an inverse head-and-shoulders that targets the 1.6725 – 1.6747 resistance.

The neckline was broker early in the sesssion today and so far, the price action has been convincing. There is no significant resistance. A fall back below 1.6500 wold be a troublesome scenario for the bulls.

How does 500 pips in 22 hours sound?

That’s how much EUR/JPY has fallen. Risk aversion is gripping markets after news that Dubai World is struggling to meet its debt obligations triggered solvency fears around the world.

Most U.S. traders were on holiday on Thursday so what we have seen so far could be just the beginning. We are seeing major breakdowns in many charts, with all the yen crosses tumbling.

Japanese government officials and central bankers are growing extremely concerned and there may be some sort of intervention in the day or days ahead. Japanese Finance Minister Hirohisa Fujii says he may contact the U.S. and Europe “if necessary.”

The comments are designed to scare currency traders away from speculating on a further yen rise but there are likely to be statements from other countries and the G7 before we see any real action.

Let’s take a look at the chart of EUR/JPY in the past two days.

We see a huge plunge from 133.50 to a low of 127.09. That’s nearly a 650 pip move, most of it coming after support at 131.50 broke. At the moment, we are seeing some consolidation but more volatility is certain in the day ahead. As always, the trend is your friend but with a chart like this one, you need to get a good entry position and continually protect profits. Beware of any rallies over 129.63 and 130.04 is likely a pivot point.

You can bet that the people at the Federal Reserve have been glued to thier Bloomberg terminals all day with one chart on their screens — USD/JPY.

Today’s fall in the pair is no doubt a frightful one. One day after the FOMC minutes revealed that the Fed regards the dollar decline so far as “orderly”, we’re seeing the first signs of a disorderly decline.

In short, things could get start to get ugly here.

One of the tenants of forex technical analysis is to look at intermarket dynamics. There are correlations; some strong, some weak. One of the better correlations of the past two years has been that when stocks risk, the U.S. dollar makes gains against the yen.

Today, with the S&P 500 up 5 points and near a one-year high, we are seeing the U.S. dollar getting crushed against the yen and everything else. Another tenant of technical analysis is that when correlations start to break down, something is changing. What is changing here? Could it be that we are seeing the beginning of a massive dollar sell-off? It’s starting to feel that way.

But before we get too ahead of ourselves, let’s keep an eye on the calendar. Thursday is U.S. Thanksgiving and that should sap trading volumes. Afterwards we get into a bearish seasonal period for U.S. stocks and any sustained decline should boost the U.S. dollar.

What we want to watch, more than anything, is the same chart they’re watching at the Fed.

USD/JPY four hour

We can see that critical support at 88.00 has broken. We wouldn’t be surprised to see a retest of that level before the weekend but the technical damage is done.

What’s truly scary, however, is not that we’ve broken the support on the four hour chart. It’s that we are very close to support on the long-term charts. The weekly support on the left side of this chart is a 14-year low. A break below here would open up the possibility of a test of the all-time low of 80.

Needless to say, this weekly chart shows that we’re already within a few pips of some very, very critical support.

For traders, remember that support levels like these are rarely broken on the first try. We may see a break and then a retest and overall volatility. Still, the implications don’t look good for the U.S. dollar if 87.12 can’t hold in USD/JPY.

What might happen in the event of a disorderly decline in the U.S. dollar? Here’s what the FOMC said in yesterday’s minutes: “Any tendency for dollar depreciation to intensify or to put significant upward pressure on inflation would bear close watching.”

Such a decline in the U.S. dollar has the potential to create a massive conundrum for the Fed. If inflation rises, they will need to raise interest rates. But can they raise interest rates with the housing and banking sectors so fragile? If they are forced to raise rates, what will that do for the recovery? If they don’t raise rates, what will it do for the dollar?

This is what the Fed is worried about right now. Watch dollar-yen closely and listen to what the Fed says next.

The biggest moving G10 pair on Tuesday was NZD/JPY. It fell 1oo pips to 64.25 from 65.25.

For the last 5-7 years this pair has represented the carry trade. Leveraged traders borrow in yen and invest in NZD-denominated securities. The reason is that Japan has had the lowest interest rates and New Zealand the among the highest (they were the highest until last year when they were surpassed by Australia).

The yen-kiwi carry trade was an incredible trade from 2000-2007 as it marched higher and higher. The reason this trade is so lucrative is that it’s self-fulfilling. As people borrow yen move them out of the country and into New Zealand dollars, the effect drives down the yen and props up the kiwi.

Eventually, a huge speculative bubble formed leaving the yen undervalued and kiwi overvalued. When the credit cruch hit, traders rushed to the exits en masse. We can remember one particular day at the height of the credit crunch when this pair fell 13% in a single day. Imagine a country losing 13% of its relative value in a day! It was pure insanity and an incredile trading opportunity because it represented a 1000 pip move.

In the past nine months, we have seen traders re-enter the NZD/JPY carry trade and it has been trending steadily higher.

NZD/JPY weekly since 2005

On the extreme right of the chart, notice that the momentum looks to be dwindling. The Reserve Bank of Australia continues to deny the possibility of rate hikes and has warned carry trade participants that they’re going to get hurt.

In the past day, that is what has happened, as we saw a series of swift falls.

15 mins NZDJPY

We have drawn in the line at 64.03 for emphasis. Late yesterday this created a perfect double-bottom. This was an encouraging sign for the bulls but the bounce only reached 64.65 before plunging below 64.00. This is a worrisome signal for the pair and for risk aversion as a whole. Fortunately, there is some very strong support down to 63.88 but if that breaks, beware of a swift fall to 63.00.

Nothing builds the tension in the forex market like a range trade.

And at the moment, EUR/USD continues to show all the characteristics of a great range trade. It has flirted with the top and bottom of the range several times, including a handful of false breakouts and headfakes.

Take a look at this chart and envision yourself selling near the top line and buying at the bottom line.

It looks like a 200 pip machine. Of course, it hasn’t been without some scary moments. Last week was a big one as the market bounced 90 pips at 1.4850 only to fall through the bottom of the range in a false breakout.

Discipline is the only way to fight headfakes but false breakouts can be contended with by using wide stops.

Another way to limit risk is by taking only one side of the range trade. If you have a bias toward an eventual breakout, sell two or more units on that side of the trade and book a profit on half when it nears the edge of the range.

Of course, playing the breakout trade is the big, sexy trade. The interesting thing at the moment is that it is very difficult anticipate a breakout on either side of the range in the next few days.

On the topside, resistance runs up to 1.5060. A daily close above this level would probably assure a significant test of the 1.61 all-time high.

On the downside, we are now seeing significant support at 1.4800 followed by less important support at 1.4686 and 1.4627. if the range breaks on the downside, it may just open up a wider range trade. At this point, the technical picture for a full-on reversal just isn’t strong enough.

There are a few charts to watch in relation to the range. The first is the S&P 500. Today, we saw a big jump in U.S. stocks that narrowly failed to take out the 2009 high of 1113. We don’t see this as a failure … yet. If there is a meaninful reversal below 1100 in the next two days, it could serve as a double top. If we see a break above 1113, the bias is certainly toward a rally in the euro.

A second chart is gold, which hit a record 1171 today. For years, the euro and gold have been correllated. This time, it seems the euro was way out in front of gold. Gold should start to encounter resistance leading up to $1200. A break paves the way for a euro test of 1.60.

The third chart to watch is EUR/JPY. This chart is THE measure of risk appetite in markets. Unlike stocks and gold, this chart is flashing some definite red flags.

The downtrend is obvious on the three-month chart. What’s especially worrisome is that we are appearing to turn lower after bouncing off major support at 131.70. If we don’t see a move higher and break of 133.60 in the next day or two, we expect to see a swift fall toward 130.00.

 In the day ahead, the preliminary report on third quarter GDP is expected at 2.8% from 3.5%. Unless we see something close to a half-point from the consensus, we don’t expect a large impact from this report. The market is more concerned about the final quarter of this year and Q1 2010. Also, keep a close eye on the Ifo and U.S. home sales data.

It looks like our Australian dollar call was a good one, especially if you could bear the head-fake in the first hour of the trading week. We still see plenty upside in this trade but the economic data in the day ahead will play a big role.

Is AUD/USD ready for another push higher?

This chart has tended to overshoot in the past before a swift move higher. The trendline has been tested four times in the past. It has rallied virtually every session (14 out of 16 days, with two minor down days) in the four sessions following a failed break. The average gain in the four days that follows a failed break is slightly more than three cents.

On factor that raises some concerns is that the daily Bollinger hasn’t tested the lower band like in other instances. This raises the possibility of a further correction.

On the hourly charts, we see further reason for guarded optimism. Since the peak at 94 cents on Nov. 16, the rebounds have followed a similar pattern with a rebound to the 61.8% and 38.2% Fibonacci levels. The most recent decline has already rebounded above the 61.8% level, suggesting a 100% retracement to 0.9210.

With this sort of scenario in mind, a short-term trader may wish to go long AUD/USD now, risking no more than 0.9100 with a target of 0.9200. After that target is achieved wait for any pullback to establish new AUD/USD longs, never risking more than 0.9100.

Markets are always in a precarious balance but with stocks pulling back today and the EUR failing to break 1.50 against the USD, it feels as if there is a prolonged agony in the forex market.

At the moment, we can see that the 1.5050 – 1.4800 range is well-established. What makes it so important is that 1.50 has capped the euro in the past and a definitive break higher will probably mean a re-test of the all-time high near 1.60.

What we’re seeing is a negative scenario developing. We see lower highs since the failure at 1.5050. At the bottom of the range, 1.48 looks like solid support but if it breaks, there will likely be extended downside. Looking at the stochastic chart, a break lower is the favoured scenario but go with a break in either direction.

The great thing is that a resolution is imminent.