Overall, I've been bullish on the Japanese yen for quite some time now.

I have been a big believer in it since the yen exchange-traded fund, CurrencyShares Japanese Yen Trust (FXY), was in the mid-80s and boy did I call that rally! The yen has recently gone over the 103 level and has reaped some tremendous gains.

However, in the near term (the upcoming weeks to a month or so), I suspect that the yen may have a minor pop higher but not surpass the 103 high.

Then I believe it will take a dive through the steeper uptrend line at 97-ish. It could even happen without the rally.

Why? Well, the yen has been used as a kind of risk gauge in the financial markets for months now. As stocks around the world have fallen (in particular the Dow and the Nikkei), the yen has loved it and rallied hard as traders ran away from loftier assets and into beaten-down assets — like the yen, which had been sold off for several years in a row.

Now that financial markets have stopped diving in the near term and volatility levels have died down, the market has moved sideways in a very wide range.

Lately, the U.S. stock market has been rallying even in the midst of more bad news, like General Electric's bad quarter or the Goldman Sachs recommendation to sell short Washington Mutual.

It has been my experience that when stocks rally on "bad data" days, the worst may be behind us and in fact already baked into the cake, so to speak.

Market bottoms always have something catastrophic in them. I'd say this one will be remembered for the Bear Stearns blow up and for the Fed helping JPMorgan to pick up the pieces.

There will be more data and more write-offs and more unexpected announcements, that's for sure.

However, as long as the market has factored them in with price-to-earnings ratios of 15 on average now, we've probably seen the worst at this point.

So even though the economy may take many more months to really pull out of it, stocks tend to start rallying at the bottom of an economic cycle, when the news is at its worst and the economy hasn't technically turned around.

The smart money goes in and snatches up value when it feels the economy and corporate earnings as a whole are only about six months from turning around. So they lead the recovery.

That's why I'm bullish on stocks for the first time in a long time, even though I think the actual economy will take a bit longer to turn around.

That said, since that's my near term view, I believe that the yen as a risk gauge is overdone at this point.

Next, let's look at the technical reasons: The yen went parabolic as it quickly moved from 92 to over 103.

This was unwarranted in the same way that a stock's price cannot get too far ahead of its earnings for too long no matter how good they may be. The same effect has happened to the yen.

The yen recently blew off some steam. However, after it rallies again, I think it will take another stab at its steepest uptrend line, crack the 97 level, then head back towards the 92 to 93 levels.

Once this happens the yen will probably have a reason to rise one last time before stocks finally stage a good rally.

You'll probably see stocks build a base here for a bit longer and the yen pull back overall as a result.

If stocks (in particular the Dow and Nikkei) were to take out new lows, then the yen would have a license to head for new all-time highs.

And, if in fact stocks launch higher out of the sideways base that it's building, then there will be no reason for the big institutions to stay in the yen trade. Once the coast is clear, they can and will go back into riskier assets.

I'm starting to get bullish on the Nikkei at these recent levels. So if I'm right about the Nikkei recovery, then you'll see the yen reach even the 88-92 levels within weeks to months.

For you spot forex traders, that yen exchange-traded fund (FXY) going downward would push the USD/JPY spot forex pair upward. So as the yen weakened it would, by default, push the dollar up against it.

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