As the dollar remains weak across the board thanks to renewed concerns about the strength of economy recover, the dollar-yen ratio currently sits just above major long-term support in the 87-88 yen range.

The longer out you look on the dollar-yen charts, the more clear it is that this currency ratio is at a major point of determination. Two year and five year charts clearly demonstrate that long-term dollar support rests at this 87-88 yen level, which was touched once between December 2008 and January 2009, and again in early to mid October.

The dollar reached a historic low just below 88 yen when it fell hard from its all time high over 125 yen in the summer of 2007 to that mark just one and a half years later. After bouncing back over 100 yen in the middle part of 2009, the dollar-yen again fell on hard times with a steady move back to 88 yen in October.

It appeared as though buyers were pouncing on the under valued dollar during October when the dollar quickly bounced back over 92 yen. However, the enthusiasm was short lived and the dollar-yen is back ready for a retest of both its short-term support and long-term support.

Investments periodically face defining moments over the course of time and it appears that the dollar-yen is on the cusp of one very soon. Another clear bounce off support at 87-88 yen would form both a near-term double bottom and a more important long-term double bottom to coincide with the previous bounce off that level as the calendar changed from 2008 to 2009.

Another solid buying effort could pave the way for a medium to long-term reversal of direction for the dollar-yen, though it is hard for many to imagine such a swing at the moment given the low to no interest rate policy by the Fed and little positive economic news in the moment. Of course, currency reversals often happen before many speculators catch on. The momentum push is usually what produced a significant trend move or reversal.

The other possibility is that the dollar could make a clear nosedive through 87-88 yen support, potentially sparking a drastic move lower toward 80 and below. Typically, when an investment breaks below or through an important support or resistance level, there is near term follow through by momentum traders, especially if there is nothing in the market to prevent it. Given the significance of the 87-88 yen support for the dollar, such a fall is easy to imagine.

Technical traders have identified what is known as a bearish engulfing pattern on candlestick charts taking place in the trading pair during October to November. This is a pattern in which a reasonable, yet brief upward bounce is quickly “engulfed” by a swift move back in the direction of the bearish trend. Whichever direction the dollar-yen takes, someone is sure to profit.

Neil Kokemuller
9:23 AM EST
Friday, November 20, 2009

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University. He is also in house stock market commentator at Live Charts UK, where you can find real time charts and share prices.

Please note: The information provided in this article is intended for informational and entertainment purposes, and not as advice for financial decisions or investments. Actions taken on the basis of the information shared is at the sole risk and discretion of the individual. Currency investment poses significant risk of loss.