Despite gains of more than 700 pips since July 8th, USDJPY ended last week on a sour note. On Thursday, the pair failed to close above the pre-Brexit highs on a daily basis and subsequently carved out a bearish engulfing pattern.
The first 24 hours of the new trading week haven’t been much better for buyers with the risk-sensitive pair tumbling an additional 90 pips from yesterday’s high. If risk assets continue to weaken as they have thus far, last week’s bearish engulfing candle could begin to trigger a more aggressive move lower by mid week.
One thing I like to do with any trade idea is to establish invalidation criteria. For USDJPY, that would be a daily close above the 106.80 handle, which is also the pre-Brexit high that I mentioned at the start of this post.
However, the 4-hour chart may offer an even more precise entry and exit, if necessary.
The trend line that extends from the July 13th low failed to hold as support during yesterday’s session, which may lead to additional losses in the coming sessions.
But the combination of Wednesday’s FOMC followed by Thursday’s BoJ is no doubt a reason to stay cautious here. In fact, I will likely remain on the sidelines until these events are behind us to avoid getting caught on the wrong side of a volatile market.
If we get a spike higher into the 106.20/30 area followed by bearish price action, it could make for a compelling short opportunity. On the other hand, if prices weaken too far too fast or take out the new resistance level shown below, it may be best to remain sidelined.
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