Updated: Mar 12, 2020
USD/JPY Short Thesis
The USD/JPY pair is currently nearing the upper resistance level of a year-long triangle consolidation, prompting the investigation into the risk:reward of a monthly short position.
The weekly candle opened strongly on Monday, touching the top of the Bollinger Bands and possibly bouncing off the prior-established resistance line. We expect to see a pull-back in continuation of the triangle, to the ~108.00 level. This gives us a move of roughly 250-300 points downwards, with a maximum risk of 50-150 points, assuming a Stop-Loss right above the trendline.
The recent conflict between US and Iran created volatility for the Dollar, with investors pricing in the possibility of a war. In the case of a war, investors will flee from the Dollar into safe-haven assets like Gold or the Japanese Yen, causing a drop in the Dollar. Assuming the issue passes over, the trend will continue as before, with TA holding true.
Recent news regarding US unemployment rates were neutral, with results at 3.5%, slightly lower than the estimated 3.6%. This caused a slight pullback in the Dollar value, however, the USD/JPY rallied to close the week with a strong bullish candle.
Risk & Reversals
There runs the risk of a breakout of the year's consolidation phase, upon which two possible resistance levels sit: 112.100 and 114.00. If a short is taken at the upper triangle resistance, a Stop-Loss should be placed above the trendline, or at any of the resistance levels.
Chances of a breakout are low, however, the weekly candle just broke above the 200MA. This poses the possibility of a continuation upwards, which is why it is important to monitor the close of this week's price. A close strongly above the 200MA might indicate a continuation to a longer breakout.
There is also fundamental risk to the short trade, with the CPI to be released on the 14th of Jan. The CPI affects the Dollar directly as it is a clear estimate of inflation, and would give us a prediction of what the Feds will do in the near future. If the CPI beats the consensus estimates, the Dollar will be pushed up. This poses the risk of breaking the consolidation and the time-tested trendline, which will most likely have multiple stop-losses sitting above it.
Technical Analysis by: Willis Leong
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