High volume and a nearly 2% drop in the S&P 500 to 1116.48 have us in a bearish mood. The USD/JPY chart broke down when Obama announced plans to limit risk trading by separating investment banks and commercial banks while banning prop trading. It’s a story that isn’t going to go away and we expect the losses in USD/JPY aren’t going to go away as well.
For those who are truely bearish on stocks, we think going short EUR/JPY, NZD/USD or CAD/JPY is a better trade but for those who want to mitigate inter-market risk, we see USD/JPY as a better trade.
USD/JPY is forming a minor consolidation between 90.57 and 90.12. Spot is at 90.40 with the 38.2% fibonacci retracement of the Nov-Jan range at 90.36. Expect further consolidation before a break below these levels for an eventual move to 89.30.
The daily chart shows the fibonacci lines. We expect to see a move inside the 50%-61.8% ‘box’ but the short-term will depend on how decisively we can break below the 38.2% retracement level. Our bearish scenario would be negated by a rise above 91.21.