August 5 Chart of the Day - USD/JPY

Precision oriented price action technical analysis by far provides the best edges and most setups for traders and investors across the markets so that's what we use for the basis of our reviews

Why did the global markets drop sharply today? What does it have to do with Japan? And what is a "carry trade?"

It turns out those questions are all closely related so we'll address them and review the USD/JPY foreign exchange pair from a price action technical analysis perspective.

For quite some time now investors have been borrowing the Japanese yen at a very low rate and investing those funds into US equity markets.

Borrowing cheaply to buy higher-returning investments is called a "carry trade." It's a common strategy for a good reason: Carry trades can be very profitable as long as they work.

Concerns about this technique had been swirling for weeks, mostly because about $4 trillion was in use. Those concerns soared when the Bank of Japan raised interest rates from 0.1% to 0.25% on July 31.

The rate is still relatively low however it was their largest rate increase since 2007.

Now that more rate hikes are possible investors are "unwinding" their positions and selling their US equities to repay their original loans.

Admittedly, there's a lot more to all of this but essentially this is the gist of it why the markets are falling like they have been the past week.

You know what they say, the bulls take the stairs up and the bears take the elevator down...

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Monthly Chart 

Using only price action basic structure tools support/resistance we can see that price had been trading in the lower segments of the overall chart. 

However, price recently rose to levels not seen in nearly 35 years before abruptly falling.

There's really no reason to add any other tools, studies, indicators, etc to this chart.  We can see everything we need to with these two price action tools.

Seemingly, it appears as if price could continue melting through potential support levels in search of a bottom.

Weekly Chart

 
On the weekly chart we can see a fair amount of volatility within the segment and the sudden drop from the 160 area.   

Price is approaching some potential support zones and may have a major decision to make.  The only caveat is price will decide on its own timeframe and not investors or traders!

Trading around $143.9 earlier today if price were to pop from here a potential target could be the $150 area and then potentially $154 above there.

If price were to drop from here then we could possibly see 140, 135, or even below 130.

Only time will tell for sure what price will do next...

Armed with precision oriented charts like these both traders and investors can formulate their respective plans.

So what's next?