Key Points:
- Despite the recent uptrend, the pair looks ready to retreat.
- The long-term pennant should remain in place.
- Losses could extend to the 110.17 handle.
The dollar-yen has been advancing rather consistently over the past few weeks, largely ignoring the notable selling pressure besetting the greenback. Due to this, it’s little wonder that when the pair surged around 1.15% higher yesterday, hopes of challenging May’s high once again began to circle. Unfortunately for the bulls, the technical bias may not be as rosy as it at first appears and the bears could be about to stage a comeback.
As shown below, on the face of it, the USD/JPY does indeed look rather bullish and could very well be poised to push higher in the coming days. For one thing, the EMA bias is highly bullish and the Parabolic SAR is certainly indicating that an uptrend is underway. Nevertheless, these two readings could be somewhat misleading. Upon digging a little deeper, it becomes clear that whilst it is currently below price action, the Parabolic SAR could quite easily invert if yesterday’s gains are reversed. If this was to occur, the overall bias would shift to bearish rather rapidly – potentially sparking a rout.
Of course, this medium-term shift in trend hinges on a sharp near-term reversal. Luckily, just such a slip is looking rather likely given the USD/JPY’s proximity to the robust long-term declining trend line that constitutes the upside constraint of the broader pennant structure. This trend line has proven to be an excellent source of resistance over the past months and we expect that it should encourage a reversal yet again. This expectation is only reinforced by the fact that stochastics are well and truly overbought and in sore need of being relieved.
Once the bears are back in control, losses are expected to extend to around the 110.17 handle. At this price, the presence of the 78.6% Fibonacci level and the downside of the pennant should supply ample support and encourage the pair to moderate or even reverse. However, given the extent to which price action has narrowed, it is now withinthe realm of possibility that a breakout could be seen. Due to this, we may have to take a closer look at the pair nearer to the time to establish whether the USD/JPY has another reversal left in it.
Overall, keep an eye on the pair as we could certainly have a bumpy few weeks on our hands. Moreover, don’t neglect the fundamental side of things as data releases could generate some sizable intra-day volatility for the dollar-yen.