Key Points:
- The pair’s rally has hit a road block in the form of a historical resistance level.
- MACD divergence and crossover hinting a reversal is now likely.
- Retracements are likely to be sizable but not catastrophic.
The dollar-yen looks as though it’s about to finally cool off slightly as its protracted rally begins to lose some momentum. In fact, a combination of technical signals are now beginning to reach a consensus that the USD/JPY needs to take a breather as it reaches a historic zone of resistance. As a result, we could see the recently bullish pair move back to around the 111.87 mark or beyond over the coming sessions.
Looking at the daily chart first, it becomes apparent that the slowing of the pair’s rally is not by random chance. The 114.77 level has proven to be a rather robust zone of resistance in the past and has given the bulls pause for thought. Additionally, the remarkable period of time that the RSI and Stochastics have managed to remain in overbought territory is beginning to be felt. Combined, these factors are significantly capping upside potential which should prevent further surges higher.
However, just because the pair seems to have stalled its bullish phase by no means ensures that we are about to see a significant reversal as a result. Indeed, both daily and H4 Parabolic SAR readings are still bullish, even if they are nearing the point at which we would expect to see them switch bias. Moreover, the EMA activity on the daily chart is highly bullish which will be hampering efforts to send the pair lower.
Fortunately for the bears out there, zooming in on the H4 chart reveals three key technical signals that are intimating a near-term slide is on the cards. Firstly, the MACD line is about to have a bearish crossover with the signal line as is shown on the below chart which could provide the spark needed to send the pair into decline. Staying with the MACD oscillator, the second signal is somewhat less clear but no less important. Namely, a MACD divergence seems to be occurring which reveals that the latest phase of the pair’s rally may hide some underlying weakness. The third and final signal worth noting is the potential double top candle pattern that is now nearing completion.
The combination of these technical forces should provide the requisite selling pressure to encourage the pair to begin moving lower and could take the pair as low as the 38.2% Fibonacci level. However, downsides could be capped around the 111.87 level as the 23.6% Fibonacci level might prove stronger than expected and, therefore, encourage a reversal earlier than forecasted.
Ultimately, we will also be waiting on fundamentals moving ahead which, as always, have the ability to upset near-term forecasts. In the case of the dollar-yen, the impending NFP data could light a fire under the pair once again if it comes in above targets. However, there is also the Unemployment Rate result due out which could either mitigate or amplify the effects of the NFP numbers. Consequently, keep an eye on the results as they are far from priced in.