Could the three-year, 4,900 pip rally be coming to an end for USDJPY? I don’t know that I would go that far just yet, however the pair is certainly exhibiting traits of a market that is in need of a correction.
This isn’t altogether surprising considering the massive scale of this multi-year rally that has yet to experience a meaningful pullback. Take the extended nature of the pair and combine it with the twenty-year trend line that just rejected buyers and you have a strong case for lower prices in the near future.
USDJPY monthly chart
Although the monthly chart alone doesn’t justify a bearish outlook, yesterday’s price action was certainly not that of a strong bull market. A look at the daily chart gives us the necessary clues.
Since failing at the multi-year high on June 5th, the pair has been carving out a falling wedge, a pattern that typically signals a continuation of the dominant trend. However instead of respecting support, the pair showed little hesitation as it crashed through the key handle during yesterday’s session.
Indicative of a weakening market?
Perhaps, but of course one break of support is not enough to pile on the bearish bandwagon. With that in mind we can look to the next support level that, if broken, could certainly open the door to lower prices. That support comes in the form of a trend line off the 2015 low at 115.85.
A break here would make two back-to-back failures at support – a foreign concept for the pair that has rallied nearly 5,000 pips in just three years.
Summary: Opportunity to short USDJPY on a close below trend line support. Key levels to the downside include 118.30 and the 2015 low at 115.85. Alternatively, a close back above 121.85 would negate any bearish setup and open up the door for higher prices.