USD/JPY Technical Highlights:
- USD/JPY rising wedge break is bringing into play first levels of support
- Unclear if levels will produce a meaningful low, but bounce risk is high
- Monthly reversal around resistance points to possibly larger downside in time
In the latter part of July USD/JPY broke down out of a rising wedge formation that was seen as leading to a strong move. Indeed, the break developed as anticipated and thus far has not disappointed in its explosiveness.
The down-move is bringing into play the first area of notable support via highs created in April and May that were later tested as support in June. The area in the 131.49/25 zone is an important one that while it may not create a meaningful low, it could induce a strong bounce.
The key is watch price action around support for signs of a rejection. A sudden and strong reaction may signal that such a bounce is getting started. With volatility high it would be unsurprising to see a 200-300 pip retracement before heading lower again.
Looking at the bigger picture, last month’s reversal candle back below a high from 20 years ago suggests that there may be a bit further to go before we see USD/JPY find a sustainable low. Rising wedge patterns have the potential to cause a retracement back to the low of the pattern, which is in this case would be in the 126s.
For now, taking one step at a time. From a tactical standpoint, existing shorts will want to watch support nearby for signs of a bounce. Chasing shorts here with new short positions doesn’t look like a good idea from a risk/reward perspective. Would-be longs looking to a level to enter may also want to watch for signs of rejection here.
USD/JPY Daily Chart
USD/JPY Monthly Chart
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—Written by Paul Robinson, Market Analyst
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