USD/JPY can’t seem to find the bottom after swinging down steeply in recent days. Or will today’s price action turn out to be a meaningful turnaround?
Let’s recall our Tuesday’s commentary:
(…) Today’s downswing brought the exchange rate below the black support line that is based on previous lows. It suggests that further deterioration may be just around the corner – especially when we factor in the sell signals generated by the daily indicators.
If this is the case and the pair extends losses from here, where could the bears aim to go? We would likely see not only a test of the next green support zone based on the mid-November lows, but also a test of the lows created at the turn of October and November, which is where our initial downside target currently is.
There’s one more thing, and it’s the head and shoulders formation in the making. The exchange rate dropping below the lower black support line (that would be the neck line) could trigger a move even to around 107.32. This is where the size of the downward move would correspond to the height of the head-and-shoulders formation.
USD/JPY has indeed moved sharply lower after the breakdown below the black support lines based on the previous lows, making our short positions even more profitable.
This decline brought the exchange rate below the mentioned green support zone, which doesn’t bode well for the bulls – especially when we factor in today’s bearish orange gap.
While the buyers pushed the pair higher to trade above 108.00, the exchange rate is still trading not only below the upper border of the gap, but also below the previously broken green line. This suggests that today’s rebound could be nothing more than a verification of the earlier breakdown.
Additionally, there are no buy signals at the moment that could encourage the buyers to act. Connecting the dots, as long as the gap is open, another attempt to move lower should not surprise us. The downswing would be supported by the above-mentioned head and shoulders formation.
Therefore, we decided to move our stop-loss order lower to protect some of our gains, and move lower our downside target at the same time.