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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.
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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.