USD/JPY: Historic Recurrence at 120?

North American markets are feeling a little rambunctious this morning as the hangover from the Federal Reserve’s altering their emphatic language from “considerable time” to “patience.” So far, this is being viewed as a slightly more hawkish stance from the venerable institution as equities have continued to climb, oil continues to fall, and the USD enjoys some more strength. However, as the market prepares to be more “patient” does that mean that they will continue to buy everything related to King Dollar? If the USD/JPY is any sort of primer, there may be some doubt, or pause, about to take place.

For those who are unfamiliar with the term “historic recurrence,” it is simply just a fancy way of saying that history tends to repeat itself. Countless examples of this phenomenon can be pointed out in markets where previous patterns are repeated time and again and forms the basis for the technical analysis traders use every day to speculate on their favorite instruments. The USD/JPY in particular is an interesting case as the 120 barrier has so far uncannily acted in much the same way the same instrument did at the 100 level; namely a “pop and drop” where the intriguing level was surpassed only to be relinquished again soon after.

What followed that break of 100 so many months ago in the USD/JPY was a relative snooze-fest as investors expected fireworks, but instead witnessed a series of duds (Figure 1). The sideways triangle pattern that formed frustrated a large portion of the trading world until it was finally breached and advanced to 105, and then promptly did the same thing; broke an important level and then went sideways (Figure 2). Could historic recurrence prove itself a worthy adversary for this currency pair once again?

In each of these cases, the retracement back up after the drop below the big figure was approximatly 78.6% from top to bottom, which could give us a vantage point for current market dynamics if historic recurrence were to win out again. If the same pattern were to repeat, the 78.6% retracement for current conditions lies around 120.50 and could set the stage for lackluster price action as we head in to the final two weeks of 2014.