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For those who trade currencies and Yen crosses in particular, last three weeks were truly eventful. We witnessed, or even participated in, very large moves. These kind of of moves were experienced for the first time by most current Forex traders. Why? Currency trading has been embraced by general trading public after 2000. During this time period there were no moves of this magnitude so fast.

Price action like that is not without precedence. In 1998 we had even more severe sell off in Yen crosses, with the biggest one day trading range about 1600 pips, considerably larger than 1000 or so pips lately. That particular market panic was attributed to the implosion of Long Term Capital Management hedge fund, with it star studded team of managers and traders. From the perspective of years we can see that led to a prolonged bull market in Yen, with GBP-JPY falling to 150 two years later.

In February of this year we had good size Yen rally, leading to 221 level in GBP-JPY. This particular cross, and AUD-JPY together with NZD-JPY, have been speculators favorite. Large daily moves, very attractive interest spread differential, presented large potential gains. In the craze of “carry trade" many people entered into positions not fully understanding risks or simply over leveraged.

Once price resumed its upside direction in early March, many brokers, trading houses money management companies and trading advisors issued “buy" recommendations citing that the worst was over. New positions were established especially between 225-230 levels. That is the reason there was such a move acceleration once the prices fell under 230 last week. All those long positions opened few moths ago at those levels were being liquidated. Some voluntarily but , sadly, many more traders were issued a margin call and their holdings were dumped.

So what now? Is the worst over? Probably not. These kind of moves are often first leg in a longer term direction change. Most recent major low point of 221 has been undercut on Friday. This is a first important sign that previous trend has been broken. Prices moved higher later on in a day, but that's also consistent with significant price reversal formations. Don't be surprised to see level of about 240 again and then resumption of down trend.

Analysis of historical reversal patterns indicates that daily price movements should stabilize somewhat ever next couple of weeks, returning to the more “typical" 200-300 pips daily range for GBP-JPY. Should the price breach the 220 again, bear market would be confirmed. Judging by recent price swings, that would indicate a target of about 200-195 for the down move. Expect much more orderly sell off, not like last week. As always, time frame is the most difficult aspect of trading to predict, but about a year to a year and a half would be good fit between historical patterns and current market behavior.

It must be noted that this current “sub prime credit crisis" or whatever name the mainstream press will eventually label it with, is just a stumble, a breather in a multi year major bull market for GBP-JPY, well on it's way to 300 in some, not too distant, time in a future.

Mike Kulej is a Chief Forex Strategist for Spectrum Forex LLC., and a creator of highly effective “Rainbow" trading system. He specializes in mechanical trading systems as explained on www.spectrumforex.com . Spectrum Forex LLC offers numerous services to individual traders. With questions and comments e-mail him at kulej@spectrumforex.com .

source:searchwarp.com