June 3 (Reuters) - This year's USD/JPY drop leaves traders in a precarious position, as they hold an enormous wager on a further decline, even though the fall may be the foundation for a bigger rise.

It took heavy intervention by the Bank of Japan and a significant change in monetary policy to cap USD/JPY, yet the following drop still fell short of the target for a minor correction of the long-term uptrend.

That minor correction of a major uptrend has led to an oversold situation and speculation on a drop that is almost twice as large as any prior short position.

USD/JPY has stopped short of 139 three times in the last two years and has been stuck short of this crucial point for almost two months.

The Japanese central bank has paused, and so has the Federal Reserve, underpinning USD/JPY during a period when stocks have boomed. USD/JPY usually rallies when stocks rise.

Big speculative bets are regarded as indicators of reversals, which is why data is so well followed. The yen long is therefore a reason to consider the prospect of a USD/JPY rise that may not just correct a stretched situation but may lead to a return to the uptrend that had endured since 2011.

When compared to the rise since 2011, this year's reverse is similar (23.6%) in extent to the pullback for stocks. The smallest reverses for equities have been followed by swift and impulsive rallies that have lifted them back toward record highs. A similar USD/JPY could be led by a short squeeze.
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(Jeremy Boulton is a Reuters market analyst. The views expressed are his own)