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USDJPY faces a big test this week as the pair comes into the key support area at 119.60. I mentioned this potential setup over the weekend, but the potential risk to reward is worth mentioning again.
The USD has experienced a shift in momentum coming off last week’s FOMC statement. While I do think this shift will be short-lived relative to the broader market sentiment in 2015, it can easily provide us with enough backing to profit from USD weakness over the coming days and weeks.
If you have followed me for any length of time, you know that I’m a huge fan of playing simple technical breaks, especially those that occur on channels and wedge patterns. As luck would have it, USDJPY has been forming an ascending channel since mid January.
USDJPY daily chart:
The pair has also carved out a resistance level in the form of a trend line coming off this year’s high, which also represents an eight-year high for the pair. But I’m more focused on channel support right now. In the recent past, any support level for this pair would certainly have me looking for a buying opportunity. However given the recent USD sell-off, I’m favoring a break below channel support.
That said, it’s important to remember that a short setup can only be confirmed on a 4 hour close below support. Only then can we begin looking for a short opportunity. That opportunity can either come on a 4 hour close or a retest of former channel support, which would then act as resistance. Either way, a close below the level is essential.
Summary: Wait for a 4 hour close below channel support and then watch for a retest of the level as new resistance. Key support comes in at 118.20.