Tactically Bearish USD/JPY on Retracement from 2-Year Lows

Point to Establish Short Exposure: Retracement to low of 2017 at 107.32

Spot: 106.03

Initial Target/Point to bring stop to break even:104.20 (100% Fib. Extension of 2017 high)

Swing Target (If not holding trade 🙂 103.20 (78.6% retracement of 2016-2017 range)

Invalidation Level: 108.50 (Ichimoku 26-day midpoint, 50% retracement of 2016-2017 range)

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Trade Logic

US Dollar momentum remains heavy, and quietly, the Japanese JPY has moved to the strongest level against the USD since 2016. A key signal can be found from the lack of JPY selling after Japanese PM Shinzo Abe nominated Haruhiko Kuroda to another term at the BoJ. Another Kuroda terms are expected to bring further easing by the Bank of Japan.

Over the trading week, USD/JPY dropped as low as 105.55 before jumping back up to 106 toward the close of the trading week.

Traders looking for an opportunity to jump into the trade to rejoin the downtrend can look to a retracement that moves to a range between the 2017 low at 107.32 and the February 15 high at 107.02.

Multiple Forms Of Technical Analysis Showing Downside Bias

A recent article by Jeremy Wagner, CEWA-M on USD/JPY pointed to a potential target toward 103 before a broader relief rally ensued, with an alternative view that makes a move to 100 possible.

Technical Outlook Favors Downside Continuation Below 108.50 (Ichimoku Cloud’s Kijun-Sen line)

A clean downside target on USD/JPY would look to Fibonacci levels at 104.20 and is followed by 103.20. The key technical development this week was a move through 106.60 support, which opens the downside momentum and likely takes out a lot of opposing resistance as buyers are likely exiting on well-defined USD weakness.

Traders entering this trade would do well to manage risk by applying a trailing stop. The support near the price targets may cause profit-taking in USD/JPY that could set up for a bounce favored by Jeremy Wagner.

Naturally, momentum is a formidable foe so fighting the trend is not a favored view. Traders would do well to find supporting evidence with price breakout and close above resistance, such as 108.50 or if bold-enough, against aggressive support like 103/100 with a tight stop for fighting this trend.

USD/JPY Chart Momentum Indicator, Ichimoku Cloud Applied

Chart created by Tyler Yell, CMT

USDJPY Sentiment Shows Longs Positions Continue to Rise as Price Drops

We typically take a contrarian view to crowd sentiment, and the fact traders are net-long suggests USDJPY prices may continue to fall. Traders are further net-long than yesterday and last week, and the combination of current sentiment and recent changes gives us a stronger USDJPY-bearish contrarian trading bias.

Discuss this trade with me below!

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Written by Tyler Yell, CMT