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Yen Crosses Show Signs of Continued Weakness

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AUDJPY pennant on the 1 hour chartMonday’s massive drop in the Yen crosses was not a one-off event. The catalyst was a culmination of concerns that have been brewing for quite some time and are therefore not likely to dissipate any time soon.

The severity of Monday’s volatility was on pare with the 2008 crisis. While this doesn’t mean that we are on the brink of another global crisis, it does signal that a flight to safety is once again beginning to take shape.

As price action traders we don’t care much about why something happens. Instead we focus on what the chart is telling us by using simple strategies and patterns combined with key levels in the market. That said, paying attention to market sentiment goes a long way regardless of whether you rely on technicals, fundamentals or a combination of the two.

NZDJPY bear pennant formation on the 1 hour chartThis brings us back to the extreme moves we saw in the Yen crosses during Monday’s session. In order to use it to our advantage we need to understand why it happened. To be succinct, the Yen strength represented a flight to safety due to concerns about the health of the global economy, namely China. That’s all we really need to know as technical traders.

Why is this important, you ask?

It’s important because it’s that kind of fear that will fuel continued Yen strength; and after a move like we saw yesterday, many traders may begin to think that a considerable bounce is in order. As many technicians may claim, the market is “oversold” – a term that is extremely relative in my opinion and doesn’t carry much weight, especially during times of increased volatility and fear.

GBPJPY pennant formation on the 1 hour time frameAnd while the Yen crosses did attempt to claw their way back from the lows during yesterday’s session, a meaningful bounce isn’t likely given the increased level of fear that persists.

The charts to the right show some of the patterns we were watching yesterday that hinted at the idea that these Yen crosses were gearing up for another leg down. And while these crosses may offer up favorable selling opportunities in the near future, I still prefer EURJPY, mostly due to the fact that unlike other Yen crosses it has yet to sell off aggressively which means we are able to sell it at a premium.

But of course we already covered this one in yesterday’s commentary, so we turn to another Yen cross that also has a ton of room to the downside in USDJPY. The pair recently broke an eight-month support level in the form of a trend line off of the current 2015 low.

Since Monday’s rout, USDJPY has been respecting our key horizontal levels beautifully. This allows us to use these levels to identify favorable selling opportunities. One such opportunity that could materialize this week would come on a daily close below the 118.30 handle.

I especially like this trade idea due to the fact that the next significant support level doesn’t come in until 115.84, giving us 250 pips to work with. Break that and we could see the pair close the gap from last October at 112.30.

Summary: Watch for a selling opportunity on a daily close below 118.30. Key support comes in at 115.84 with a break there exposing the gap from last October at 112.30. Alternatively, a close back above 120.40 would expose former channel support at 122.00.

USDJPY key levels on the daily time frame

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