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Guest Commentary: A Fed-Inspired Short Set-up in USD/JPY

Guest Commentary: A Fed-Inspired Short Set-up in USD/JPY

2014-03-19 03:30:00
Todd Gordon, Technical Strategist
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Wednesday’s Federal Open Market Committee (FOMC) statement due out at 2 pm ET should produce some badly needed volatility in the FX market, and we’re looking to use the announcement as an opportunity to initiate new short positions in USDJPY.

On the daily chart below, we’ve seen price move lower from 103.75 (in pink) towards the green uptrend line from early 2013. This would potentially be the first test of that trend line since late 2013, and the current trade idea is based upon the premise that the trend line will hold on this first test.

Guest Commentary: USD/JPY Nears Daily Trend Line Support

Volatility on the heels of Wednesday's FOMC announcement is likely to cause a test and eventual break of trend line support in USD/JPY, giving rise to potential short-entry opportunities in the pair.

Drilling down to the three-hour chart below, we’re looking for the FOMC statement to temporarily push USDJPY from around 101 towards 102, where it should then start to find resistance from the prior-degree fourth-wave high. This level is further strengthened because it’s also in line with two key fourth-wave Fibonacci ratios, being the same size as the blue wave (ii) pullback and 38.2% the size of blue wave (iii).

Guest Commentary: Potential Short Set-up in USD/JPY

Following Wednesday's FOMC announcement, traders may look for a spike in USD/JPY to give rise to potential short opportunities from key Elliott wave and Fibonacci levels near 101.85.

In all, we’d look to sell USDJPY just before these key levels at 101.85 with a stop at 102.55. From here, we intend to assault the green trend line with a single target at 100.85. The 100-pip target and 70-pip stop provides a risk profile near our ideal 1.50. While it’s always hard to be precise about the exact level of the trend line, we do expect this first test to be rejected. However, we expect a subsequent assault to succeed and break through the green trend line.

The daily chart shows that USDJPY should eventually fall towards the 95-97 range before a pullback and subsequent move lower. During that time, stock markets would also move lower, as they tend to be correlated to key JPY pairs including AUDJPY and USDJPY (i.e. if those FX pairs fall, stock markets typically fall as well).

Potential Short Set-up in USD/JPY

  • Trade: Sell USDJPY at (or near) 101.85
  • Stop Loss: Place stop at 102.55
  • Target: The single price target for this trade is 100.85

By Todd Gordon, founder, TradingAnalysis.com

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