USDJPY: Clues Point to Break Lower, Not Higher

·    December 17, 2018

·      December 17, 2018

·    December 17, 2018

The USDJPY is still consolidating within a narrowing wedge pattern.

I’ve written about it several times in recent weeks including December 2nd and again on the 11th.

I even mentioned it in yesterday’s weekly forecast.

Speaking of Sunday’s commentary, I want to call your attention to a particular excerpt.

Here’s what I wrote:

If USDJPY fails to reach 113.80 this week and instead rolls over, I would expect a breakdown within a matter of days.

A failure to retest resistance at 113.80 would suggest weakness.

There’s still time for USDJPY bulls to push prices higher this week and retest wedge resistance up near 113.80.

However, today’s decline could be a significant clue.

It may indicate that USDJPY has no intention of a bullish break. The alternative is, of course, a break to the downside.

And if the pair does retest wedge support before reaching resistance, it would all but confirm the breakdown in my opinion.

But there’s another reason I’m not so bullish USDJPY.

As you may know, the Japanese yen reacts to risk assets such as equities. When these markets suffer, the yen appreciates.

As the yen appreciates, the USDJPY falls. In other words, the pair has a positive correlation to an index like the S&P 500.

Here’s what the S&P did at the end of last week:

SPX500Weekly New

That’s a breakdown of an upward sloping flag that began in January 2018.

It’s an incredibly significant development in my opinion.

A channel that forms with the trend like this usually denotes the end of said trend.

Friday’s breakdown is particularly striking when you consider the tear the U.S. equity markets have been on for years.

Volatility has also picked up during 2018.

Short-term volatility is greatest at turning points and diminishes as a trend becomes established. – George Soros

Looking at the S&P 500 weekly chart above, there’s no question that volatility has spiked during the formation of the ascending channel.

What does all this mean for USDJPY?

In my opinion, it supports the theory that the risk-sensitive pair is about to break down from this wedge pattern rather than up.

But as always, the market will have the final say.

A daily close (5 pm EST) below wedge support near 112.70 would expose 111.70 followed by 110.70.

Remember I use New York close charts so that each 24-hour session closes at 5 pm EST.

Go here to get access to the same charts I use.

And as I wrote last week, the 470-pip height of the pattern suggests USDJPY could reach as low as 108.00 if the pair does break wedge support.

Alternatively, a close above wedge resistance near 113.80 would expose 114.50.

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USDJPYDaily New 3

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  1. I agree with the failure of a retest of at least the 113.73 handle it very likely to retest the support at 112.218 for now

  2. conclusive as always. I like especially the look to the S&P500.
    the only thing I cannot figure out is, how you get the 112.70? It should be an increasing value due to the TL direction, correct? And the 112.70 would lay 2 days ahead (on my chart today would be 112.55)? So if it closes below that level today it wouldn’t mean anything, is that correct?

  3. Hi Justin and everyone, thanks for making things clearer. However I didnt take the trade because I was waiting for the re-test… Did you take this trade Justin? Thanks

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