Is USDJPY carving a 450 pip bullish reversal pattern?
Or is the pair simply consolidating before the next leg lower?
Those are the questions on my mind as we kick off a new trading week.
But first, let’s start with something a little easier to discern.
As you can see, the USDJPY is resting on key support at 106.80. This is a level I discussed several times in September.
We even caught the breakout above 106.80 with a target of 108.00.
However, the descending channel in that post has since broken down, at least in my opinion.
I don’t like to keep a pattern around if the market is no longer respecting it.
Last week’s pullback into 106.80 combined with the year-to-date low in August has formed what could be an inverse head and shoulders pattern.
But it isn’t confirmed just yet.
USDJPY buyers need to defend the 106.80 support level on a daily closing basis.
If they can manage that, the bullish pattern stands a chance.
They would also need to take out neckline resistance up near 108.20 in order to confirm a bullish reversal.
Do those two things, and we could see USDJPY much higher in the weeks to come.
More specifically, a close above the neckline near 108.20 would target 109.00 followed by 110.60.
On the other hand, a daily close below 106.80 would expose 105.70 and perhaps even the 105.00 handle.
My one reservation about the potential for a bullish reversal is the bearish engulfing candle that formed last week.
Take a look at the weekly time frame to see the 200-pip candle I’m referring to above.
That could be enough to drag the USDJPY lower still.
Either way, I think the USDJPY is one to keep an eye on.
I’m not interested in the pair right now, though. I also think a non-biased approach is ideal until the market offers us more clues.