I think the last few days have caught a lot of people on the wrong side of the equity, bond, commodity, and currency markets. Many traders thought the S&P would break through 1420, as the 10-year yield would move back above 4.0%. Neither has happened. And then tonight, AIG dropped an earnings bomb and S&P futures are lower in the overnight session. I think USD/JPY is setting up to get pushed back below 102.00 as we trade 103.76. Basically, I am working two scenarios to get short USD,JPY.

Scenario #1: Sell USD/JPY on a bounce. I would like to get short a full USD/JPY position at an average of 104.65, with a 105.15 stop risking 50 points. The minimum target is 103.45 for a gain of 120 points.

Scenario #2: Sell a USD/JPY breakdown through 103.50. I would like to stop into a full USD/JPY position at around 103.40 with a 103.85-area stop loss. Total risk is 45 points with a minimum target of 102.50 for a gain of 90 points.

A few words about the strategy here. I will treat these as an OCO, which means if one trade series is triggered, the other is canceled. Also, because we are working with fairly large stops, I am going to hedge the trade by also getting short EUR/USD if either USD/JPY trade scenario is triggered into action. I will get short a one-third position of EUR/USD at the time my USD/JPY goes into play with approximately 25 point stop losses. If the dollar is in play to the upside tonight, I could lose on my USD/JPY short, but it will be cushioned by my EUR/USD short. Or, because the yen carry trade is extremely offered and EUR/JPY moves with USD/JPY to the downside, there is a chance I can also make a little profit on the EUR/USD trade.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

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