Why the move in EUR/JPY is significant

Take a look at the daily chart of EUR/JPY shown below.  The thing which jumps out is obviously the break to new highs the cross is making today.  The market has taken out the 143.40 area peak put in at the beginning of February, and also the 143.60 area high set back in December.  Those who follow standard charting will call that, in and of itself, a noteworthy occurrence. 

What makes it even more worthy of our attention is the volatility expansion that is taking place.  It's a bit hard to see in the chart, but the Bollinger Bands are beginning to widen out after having gotten pretty narrow, indicating that EUR/JPY is moving from a low volatility situation to a higher volatility one, which is often indicative of a market starting a significant move.

This action, though, goes beyond the daily charts, though.  The weekly chart below does not include today's action, but still gives us some useful information.  Notice how in that timeframe as well the Bollinger Bands became quite narrow as a result of the primarily sideways action in the cross since December.  The Band Width Indicator (BWI) plotted at the bottom - measuring the relative width of the Bands - reached a very low point in March.  In fact, it was the lowest reading since 2002, right before the market started a 2000+ pip move.  With BWI on the rise once more, the signs are pointing toward something substantial taking place longer-term.

But it doesn't stop there!  Check out the monthly graph below where again we can see that BWI has gotten extremely low.  It looks like the study bottomed out in the latter part of 2005, and the readings are ever so slightly rising.

Put this all together and we could be looking at a really significant long-term trend in its very earliest stages right now.  At a minimum, given how low the volatility has been for as long as it's been, we can expect more excitement in EUR/JPY over the days, weeks, and months to come.

John Forman is the author of The Essentials of Trading (Wiley).  To celebrate the book's release later this month, there will be a special 24-hour only promotion with giveaways worth $1000s.  Find out more at www.TheEssentialsOfTrading.com/special-offer.html.