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USD/JPY Technical Analysis: Sitting Near Range Support, Cautiously Bullish

USD/JPY Technical Analysis: Sitting Near Range Support, Cautiously Bullish

Tyler Yell, CMT, Currency Strategist

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Talking Points:

-USD/JPY Technical Strategy: Recent Break Below 121.75 Turns ST Focus on a Correction

-USD/JPY Unable To Gain Momentum on the Downside even with Volume Surge

-USD/JPY Key Support Going Forward: 120.00 Late October Low

USD/JPY recently awoke from hibernation to breakdown to 1-month lows below 121.06. The move lower brought a relative surge in volume, but volume was very low given the 20+ day 150-pip range between 122.20-123.75. Due to inaction from the BoJ, eyes are understandably on the US Dollar going into December 16, the date the Federal Reserve is expected to hike rates for the first time since 2006. However, it feels too early (above 120/118) to call a top in USD/JPY with confidence. We are yet to know what the next steps will be for the Bank of Japan, and from the August 24 low, we seem to be in a comfortable pattern of higher lows and higher highs now resting above the Ichimoku cloud, which is a good trend filter for placing trades. Lastly, when looking across the G10, it appears the main currencies that are giving the US Dollar a challenge are higher-yielding currencies, which the JPY is not.


USD/JPY is currently sitting on top of the support and you can see the median line on Andrew’s Pitchfork (blue channel) aligns at the current level of 121.50. In addition to the median pitchfork line, you have the late October high and 38.2% Fibonacci retracement level of the October-November range. Should this strong shelf of support fail to hold, we could see a test of a key support level at 120.00. The 120.00 level, presents the bottom of the Ichimoku cloud as well as the prior corrective low in late-October. Experienced traders in USD/JPY are likely familiar with the May 2013 consolidation after a year-plus-long run-up from 77 in USD/JPY, that spun off a seeming propensity for more corrective triangles. In essence, it seems that the sideways consolidation, known as a triangle pattern is the correction of choice. Triangles are a headache for trend followers because they typically outlast the patience of traders who wait around for a breakout and tend to have false breaks before truly completing. If there is a price pattern that acts like quicksand, it is the triangle pattern, and a price break below 120 could bring validation that we are entering another multi-month triangle that began in June. Triangles like the summer of 2013 corrective move lasted nearly 8-months, and this one could easily extend that amount if the BoJ continues to hold when the market wants a hike. However, if 120.00 holds, the triangle scenario will likely be saved for another volatile and uncertain period.


Because managing risk is of paramount importance to traders, finding strong trends with a favorable risk: reward profile is a necessary skill. The upside remains favored, and the biggest sustained move higher could still be upon us if the BoJ begins a new round of easing or the Fed rate hike schedule over the next two years exceeds expectations. For traders comfortable buying now, you are looking at 150 stop (spot: 121.50, stop 120.00), with a profit target ~450 pips away. Shorter-term traders could continue to look to buy dips without looking for a move to 125.85/126. Either way, a move below 120 negates the bullish view for the near future, but a hold and break above 123.75 would further encourage the bullish view.

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.