The USD/JPY is Still Afloat, But For How Long?

Posted Monday, August 8, 2016 by
Eric Furstenberg • 3 min read

Yesterday was a pretty quiet day in FX with no large moves to really take advantage of. This is part of trading, and great traders often have a lot of patience.

For the last four days the USD/JPY has been recovering some of its recent losses, but this looks like a vain effort by the bulls to turn things around. Look at the daily chart:

USD/JPY Daily Chart

In the red box, we see that price dropped aggressively, covering about 675 pips in a very short time. Whereas in the last four days we encountered a relatively weak bounce of about 194 pips (look at the blue box). Notice that in this bounce we see bullish candles that are much shorter than the red bearish candles we see in the red box when price declined very impulsively. The price action like we see in the blue box is characteristic of a correction or a corrective move. Now as we know, the best way to trade price action is in the direction of aggressive impulsive moves.

In the above chart, you will notice that the two days with the highest volume were decisive bearish days. When we see an aggressive price decline coupled with high volume, this indicates that we could see a continuation of the bearish momentum.

To further analyse this pair, let’s examine a 4-hour chart:

USD/JPY 4-Hour Chart

Here we can see that the RSI indicator set to 5 periods with levels of 85 and 15 recently gave an overbought reading. The price is also approaching the red 20 EMA (daily data source) which might provide further resistance to price action. If we see the bears step in with new selling vigour the big psychological 100.00 level could come into play really soon.

I am already short on this pair, and I will keep an eye open for even better levels to sell at, for example at the 20 EMA on the daily chart. I will see how price reacts to the 20 EMA and then decide if I like the context of the signal or not. Context is extremely important in FX trading. For example, if I see a rise into the 20 EMA mentioned above that is extremely impulsive, I will reconsider the entry, or perhaps wait a bit before I enter the trade. As mentioned in previous articles, I like to see signs that the price is entering a resistance zone, and is indeed starting to react to the resistance. Like, for instance, some wicks penetrating a key moving average without closing on the other side of it, even if it’s on a smaller time frame. Let’s look at an example:

USD/JPY Daily Chart (2016/02 – 2016/04)


Here you can see exactly what I’m talking about in the orange block on the chart. The price was in a steady downtrend and retraced up to the 20 EMA (the blue moving average). After several candle wicks had penetrated this moving average, the price continued to fall further. A conservative trader might have observed price action around the moving average first before pulling the trigger. Sometimes waiting for more confirmation is a safer way to trade. Of course waiting for it will sometimes let you miss out on profitable trades, but on the other hand, it may also prevent you from entering losing trades.

Furthermore, the retail sentiment on the USD/JPY is still extreme with 3 traders long for every short trader. As mentioned in other articles, this is used as a contrarian indicator which suggests that we might see a further decline in the exchange rate.

Remember that the JPY is a safe haven currency, and that turbulent economic and political times generally increase the demand for it. If you had been watching the USD/JPY exchange rate lately, you would have noticed the Yen’s tremendous strength over the last year or so. And did we not have a lot of political and economic uncertainty in the last year! So if we encounter some more investor fear, perhaps the JPY could surge even more, which would send the USD/JPY even lower.

The most important economic data releases for today are probably the Chinese CPI numbers at 01:30 GMT, and the UK manufacturing production numbers 08:30 GMT.

There are public holidays in South Africa and Singapore today, but these should not have a major effect on FX market liquidity and volatility.

Have a great trading day!

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