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USD/JPY Technical Analysis: Sharp Retracement Faces Big Test

USD/JPY Technical Analysis: Sharp Retracement Faces Big Test

Tyler Yell, CMT, Currency Strategist

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What can traders expect from USD/JPY in a year of US rate hikes? Here are our thoughts.

Talking Points:

  • USD/JPY technical strategy: anticipating a hold > 110 on closing basis
  • Breakdown < 110 could signal further JPY strength on the near horizon
  • 100% upside- extension of Andrew’s Pitchfork set as key trend resistance

JPY strength has been a major headline this week as political turmoil from the US to Brazil helped take trader’s attention away from the low-volatility Bull market. The risk-off bid was felt around markets as Gold (a classic risk-off instrument), and US Treasuries saw their largest gains of 2017. However, despite the have flows pushing USD/JPY below 111, it’s worth keeping an eye on signs of a reversal higher. If the reversal higher takes place, we could see a resumption of JPY weakness much like we’ve seen over the last month. It is also worth noting that a lack of a bid in USD/JPY could spell doom for the Bulls as many DXY longs could look to soon liquidate their position.

Make no mistake, USD has been weak lately. Luckily for USD/JPY bulls, JPY has been weaker on a relative basis, at least until this week. Thursday is seeing of the USD/JPY’s biggest drop since November, and as long as 110 holds, we could see brave buyers step in before the overall trend resumes. To get a sense of what’s likely, there are a few levels worth watching.

On the chart below, you can see the price action from April take out the top of a bearish falling channel (Andrew’s Pitchfork) that contained the price for most of the year. Now, we appear to be testing the top of the channel as support. The top of the channel and the recent stall in downward price action can be found at the 61.8% retracement level of the April-May range. While deep, a 61.8% retracement is appropriate within an uptrend. Below the 61.8%, retracement of the April/May rise is the 200-DMA at 109.73.

A hold of price on a closing basis above 110.51, the 61.8% Fibonacci of April/May rise, and the 200-DMA would likely signal a deep set-up in a trend set to continue. A break above Wednesday’s high at 113.12 would further encourage that view that the Bull trend is likely set to resume higher. A break below the 200-DMA, on the other hand, would be a clear indication that a move to new 2017 lows below 108.13 is likely soon approaching.

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Chart Created by Tyler Yell, CMT

USD/JPY IG Trader Sentiment: Yen Rallies Giving Bearish Signal Based on Sentiment

What do retail traders’ buy/sell decisions hint about the JPY trend? Find out here !

USDJPY: Retail trader data shows 58.0% of traders are net-long with the ratio of traders long to short at 1.38 to 1. The percentage of traders net-long is now its highest since Apr 26 when USDJPY traded near 111.197. The number of traders net-long is 12.4% higher than yesterday and 10.0% higher from last week, while the number of traders net-short is 23.5% lower than yesterday and 24.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDJPY-bearish contrarian trading bias. (Emphasis Mine)

The takeaway from me for IG Client Sentiment on USD/JPY is that longs are getting more aggressive on a daily and week-over-week basis. In taking a contrarian view, this opens up the likelihood of further breakdown continuing Wednesday’s price action. A break below Wednesday’s close and the 200-DMA with this sentiment picture holding could precede an aggressive breakdown.

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Shorter-Term USD/JPY Technical Levels: Friday, May 12, 2017

For those interested in shorter-term levels of focus than the ones above, these levels signal important potential pivot levels over the next 48-hours.

Written by Tyler Yell, CMT, Currency Analyst & Trading Instructor for DailyFX.com

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Contact and discuss markets with Tyler on Twitter: @ForexYell

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

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