We discussed USDJPY over the weekend as the pair was approaching key trend line support that extends off of the 2015 low. After making a lower high in August, the pair looked poised to test lower levels in the coming week.
The pair certainly didn’t disappoint as it plummeted 580 pips on Monday. Unfortunately it lost ground so fast that a favorable entry never materialized. During the decline the pair took out trend line support at 121.60 and also cracked the 120.40 handle before settling for the day at 118.30.
Then on Tuesday, an attempted rally fell short of gaining any significant ground as the July low at 120.40 capped the advance. Fast forward to today and the pair has managed to climb above this key level and is now hovering just 70 pips below a key resistance level at 121.80.
This area is key for the bears for several reasons. First, it represents two important highs from December of 2014 and March of 2015. It’s also last week’s low, the period of time just before the market sold off heavily. If that weren’t enough it is also the area of former trend line support, now resistance.
I don’t often pay attention to Fibonacci retracement levels, but when they line up perfectly with other confluence factors, they can add an extra layer of confidence to a trade idea. In this case the 61.8 Fibonacci level when measured from the August high to the recent low lines up with 121.75, just 5 pips below our key resistance level.
All of this boils down to the idea that there will be a lot of selling pressure in the 121.80 area should the pair retest it as new resistance. With this pair having rallied for the last three years, the downside potential is enormous should the risk off theme resurface next week – an idea that is likely given the recent price action across global markets.
Do keep in mind that we are in the final 24 hours of trading this week. Therefore it may be a good idea to wait until Monday before considering a short position here.
Summary: Watch for a selling opportunity on a retest of the 121.80 resistance area. Key support comes in at 120.40, 118.30 and 116.00. Alternatively, a daily close above 121.80 would negate the bearish bias and have us looking higher.