USDJPY was dragged lower this week by a slumping global equity market coupled with a weaker dollar. Those who believe this risk-sensitive pair is no longer a benchmark for risk appetite are gravely mistaken.
Of course, this week’s decline comes nowhere close to the bloodbath on the S&P 500, but the USDJPY still offers a way for Forex traders to take advantage of fear-based moves.
Even EURJPY bears had something to say this week despite a relatively stronger euro. See Sunday’s forecast as well as Wednesday’s commentary to see how we played EURJPY this week.
On Tuesday I wrote a post about USDJPY with a fairly bold title, at least according to those who felt it necessary to tell me as much. I admit, using the word “collapse” when describing a market’s structure is a bold move, especially one that’s been trending higher all year.
But I had my reasons which I outlined in Tuesday’s commentary. Essentially, the market’s inability to extend the October rally past the 114.50 mark was a red flag. Not because it signaled a trend reversal, but because it was disproportionate to recent swing highs.
In case you missed Wednesday’s post, here’s the first chart I presented:
Both the July and October swing highs you see above are disproportionate to the May high, especially this month’s move. As I mentioned on Tuesday, if buyers weren’t beginning to struggle, USDJPY would’ve targeted 115.30 or even 116.00 this month.
That didn’t happen. Instead, we got a reversal pattern of sorts at 114.50 followed by a daily close below 113.15. Buyers had little interest in defending the July high near 113.15, which meant Tuesday’s close opened the door to 112.15.
So far, USDJPY bulls are hanging on to 112.15 support as I thought they might. It’s why I highlighted the 112.15 level earlier in the week.
Despite holding above it on a daily closing basis (New York 5 pm EST), I see no indication of a bounce and every reason to stay cautiously bearish. My stance could change as things unfold, but as of now, I’m no less pessimistic about USDJPY than I was on Tuesday.
If you’re searching for an opportunity for next week, it would be prudent to wait for a daily close below the 2018 trend line support. The level extends from the year-to-date low which suggests a break of this level could turn the tide here.
And if you’re still short from Wednesday’s retest of 113.15 resistance, a close below the 111.80 area could offer a chance to scale the position.
Below trend line support we have 110.80. It’s by no means a perfect level, but it did play an important role throughout 2017 and again beginning in June of this year. 110.80 is also the 38.2% Fibonacci retracement of the year-to-date range.
A close below 110.80 would open the door to 109.80 followed by the 108.50 region. And if USDJPY should bounce from 112.15 and retest the 113.15 resistance area next week, I will be on the lookout for a sell signal.