As a price action trader in the Forex market, it’s always nice when a currency pair confirms what you had suspected. What we knew before today’s session was that USDJPY has been carving out a wedge pattern following the late-August selloff that left the pair lower by 500 pips.
The chart below shows the technical break that occurred as a result of last month’s selloff.
However what was unclear before today’s session was where exactly the support level should be placed. After all, the August 24th lower wick is a tough one to work with, which made the August 25th low a more viable starting point.
The problem with this idea (before today) was that we only had two other touches off of this support level, making it too ambiguous to develop a trade idea around.
There is a fine line between seeing what the market is showing you and seeing what you want to see; the latter will get you in trouble every time.
That problem was solved earlier in the day when USDJPY retested the level in question for a third time and quickly rebounded higher. This confirmed that the support level off of the August 25th low is indeed one to watch.
On the opposite side, wedge resistance has been fairly well-defined from the start, with the pair being rejected from this level on three separate occasions since August 31st.
Although typically viewed as a continuation pattern, a wedge is only tradable on a close beyond support or resistance. That said, I’m only interested in pursuing a short position in USDJPY given the larger breakdown that occurred at the end of August along with the ample amount of room that exists to the downside, compared to the congestion at higher levels.
Summary: Watch for a selling opportunity on a close below wedge support. From there, key support comes in at 118.30 and 116. A close above wedge resistance would likely find selling pressure at 121.80.