This past Tuesday, I wrote about a possible breakout situation for USDJPY.
More specifically, I wrote that the Fed would likely produce the breakout.
Fast forward to Wednesday’s close and you can see how the USDJPY is now trading below the 111.00 handle on a daily closing basis.
My post on Tuesday called for either a daily close above 111.90 or below 111.00.
Since the latter has taken place, it’s time to start talking about targets and invalidation points.
But before we get to that, I want to highlight another key level.
There is a trend line that extends from the January 4th open. That’s the daily session that followed the flash crash on the 3rd.
You can see in the chart below how this trend line has supported USDJPY throughout the year.
And if I draw a similar level using the highs of this year’s rally, we get what appears to be a broadening wedge pattern.
It isn’t as common as a narrowing wedge, but the implications are the same.
When formed during an uptrend, both wedges tend to signal exhaustion from buyers.
That all sounds great, but how do we trade USDJPY from new resistance at 111.00 with wedge support nearby?
It’s a tricky task, to be sure.
However, in times like this I’ve found it best to let the market show its hand.
Trying too hard to identify an entry is when mistakes happen.
If broadening wedge support triggers a bounce back to 111.00, watch to see how USDJPY reacts to the area as new resistance.
And if bearish price action develops at 111.00, there’s your cue to enter short; perhaps with a half-sized position to start.
The alternative is to wait for a daily close below wedge support near 110.30/40.
Just keep in mind that there’s a horizontal support area around the 110.00 handle that could attract buyers on the way down.
Remember too that you don’t need to enter with your full position size at once.
It’s often best to scale into positions, especially if you have doubts about an idea or if there is another key level nearby.
That way you aren’t allocating all of your capital without seeing follow through from the market.
Key support below the wedge bottom comes in at 110.10 followed by 108.70.
If this broadening wedge plays out like most, a close below support near 110.30/40 will target the pattern’s inception point at 107.60.
Alternatively, a daily close above 111.00 would take USDJPY back to 111.90.
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