Some More Yen Strength On The Way? The USD/JPY Could Move Sub 100 Soon
Eric Furstenberg • 4 min read
On Wednesday last week, the USD/JPY briefly caught a bid on the back of the BOJ meeting and interest rate decision, only to fail at trendline resistance and close the day far below the opening price. The exchange rate has been dancing around the 100 level for quite a while now, like someone walking barefoot on hot coals. The price has recently bounced off this major psychological support level several times without being able to overcome it. It looks like this support level is slowly but surely getting weaker and weaker just like the ancient armies rammed against the wooden city gates of their enemies and weakened their defense little by little. Certainly, there are many institutional market players keeping an eye on this 100 level and waiting for it to give way. You can know for sure that many stop losses will get triggered of we saw a convincing break through this level, and especially below 98.80. Many smart traders have entered long on the 100 level, and surely they’ve been able to profit out of these trades. Those who are still holding on to these positions probably have their stop losses placed in the 98.00 to 99.00 zone, or even higher (for those who have stops placed at break even). If these stops get triggered, and large market participants jump into new short positions, this could put further pressure on the exchange rate. It could be a very appealing breakout trade or even a good breakout retest trade. Let’s look at a daily chart:
USD/JPY Daily Chart
Here you can see how the bears and the bulls have been wrestling over this major level. I like the descending triangle / wedge formation that has formed, especially because it has formed at such an important level. It is considered to be a continuation pattern, and clearly, the bulls are pushing back less and less in this battle over territory.
Trading breakouts can be tricky if you don’t know what you’re doing. I believe a good way to play this pair if a breakout actually occurs, could be by waiting for a retest of the breakout level to enter at. Look at the following chart:
USD/JPY Daily Chart
So the idea here is to trade with the confirmation of the breakout actually being the real deal. When a major support zone like this is broken, it often undergoes a role reversal and turns into a resistance zone. I’m sure you’ve heard of former support which turns into new resistance. Firstly we can wait for a firm daily close below the 100 level. Then we want to see a retracement which brings us back to the breakout level, or at least close to this level. In this case, we can use the 100.00 level as our reference point to enter at. This is not meant to be a short-term, intraday trade, but rather a long-term trade which could take days or even weeks to hit its profit target. A fairly large stop loss can be used depending on the candlestick formation and other variables. Even a stop loss of 200 to 250 pips is acceptable, and in some circumstances, a tighter stop could also do the job. This is where discretion should be used to gauge the technical setup at the time of entering the new trade. A good target would be double the distance of your stop loss, and if you split your position, half of the position can be taken off when the trade reaches twice the distance of the stop loss. The remainder of the position can be used to aim for a much larger target, depending on the trading plan of the individual trader. Of course, the stop loss of the remaining position should be brought to breakeven when the first position hits its target, or even sooner.
Although this pair has been captured in a range for a few months already, it surely has the potential to break down further. We recently heard of renewed concerns about the UK financial outlook as a result of the recent Brexit. This has weighed on the pound, and it could certainly weaken the pound even more. Look at the following chart:
GBP/USD Daily Chart
The strong resistance zone where the pair recently formed a double bottom could perhaps be a hard zone for the bears to conquer. I wouldn’t be surprised to see a bounce at this level, even if it was merely a weak correction. Notwithstanding, nothing says that this pair will not shoot through this level right away without any delay. At the moment it looks like the exchange rate could reach the double bottom level soon, and the price is currently only about 173 pips away from the yearly low that was set on the 6th of July earlier this year.
News and events
Tomorrow we have speeches by the ECB president Mario Draghi at 13:05 GMT, as well as the ECB’s Nowotny at 14:00 GMT. There will also be speeches by three FOMC members at different times during the day. There aren’t any major economic data releases tomorrow, except for the US new home sales numbers which are released at 14:00 GMT which could perhaps have a mild effect on the FX market.
Good luck trading!