TA of the Day: USD/JPY Chills Out And Consolidates But For How Long?

The Japanese yen weakened in value against the US dollar on Monday, after a wild ride last week.

Markets, in particular Japan’s, were rocked last week by an unwinding of the hugely popular yen carry trade, which involves borrowing yen at a low cost to buy other currencies and assets offering higher yields.

The violent sell-off in USD/JPO between July 3 and Aug. 5, sparked by Japan’s Ministry of Finance (MOF) intervention, an unexpected Bank of Japan (BOJ) interest rate hike, and then the unwinding of yen-funded carry trades, caused it to plunge over 2,000 pips! 😲

The BOJ’s Deputy Governor attempted to calm markets by signaling a pause in rate hikes, but confusion persisted due to mixed messages from the central bank.

This situation highlights the challenges the BOJ faces in balancing market stability with its long-term monetary policy goals, especially as it navigates pressures from both domestic politics (to raise rates) and global financial conditions.

The Japanese yen is still the currency to monitor for more market drama.

If it moves higher to around 150, market participants will breathe a sigh of relief as risks for further unwinding of the yen carry trade lessen.

But if it drops (and the yen strengthens) back to around 142, this could reignite violent price swings once again. Keep an eye on this one!

What are the technicals saying?

Welcome to TA of the Day (TAOTD)! 👋

Let’s focus on the current technical setup of USD/JPY based on the 4-hour chart:

USD/JPY 4H Chart by TradingView

📈 Technical Analysis of USD/JPY 4-Hour Chart

Using technical analysis concepts covered in our forex course, let’s analyze USD/JPY.

Exponential Moving Averages (EMAs):

• 10-period EMA: Positioned around 147.14. The price is currently fair above this level, indicating potential short-term bullish momentum. The slope is upwardsreflecting recent short-term strength.
• 20-period EMA: Positioned around 146.96. The price is slightly above this level, reinforcing the short-term bullish momentum. The slope is upwardssupporting the short-term trend.
• 50-period EMA: Positioned around 147.80. The price is currently below this level, indicating that medium-term bearish momentum still dominates. The slope is downwardsuggesting a potential resistance.
• 200-period EMA: Positioned around 152.98. The price is good below this level, indicating long-term bearish momentum. The slope is downwardconfirming long-term bearish strength.

Relative Positioning of Moving Averages:

• The 10-period EMA is currently above the 20-period EMA drunk below the 50-period and 200-period EMAsindicating a short-term bullish crossover within a broader bearish context.
• The 20-period EMA is below the 50-period and 200-period EMAsconfirming ongoing bearish pressure in the medium and long term.
• The 50-period EMA is significantly below the 200-period EMAreinforcing the long-term bearish trend.

Moving Average Convergence/Divergence:

• The MACD line is slightly above the signal line, with a small positive reading of 0.112, suggesting a weak bullish momentum.
• However, the histogram’s slight increase indicates a potential shift towards more bullish sentiment in the short term.

🕵️ Key Observations

Price Action:

Let’s analyze the current price action:

1. Sharp Declines: The most prominent feature is the sharp, steep decline from mid-July to early August. The price dropped dramatically from around 162 to approximately 142, a significant move of about 20 yen in a short period.
2. Bounce: Following the low, there was a noticeable bounce, with the price recovering to around 147-148 level.
3. Bottoming Process: After reaching the low of around 142, the price showed signs of stabilization and attempted to form a bottom.
4. Consolidation: In the most recent days (approximately the last week based on the 4-hour chart), the price has been consolidating in a range roughly between 146 and 148.
5. Short-term Volatility: Within the consolidation range, there have been several attempts to move both higher and lower, as evidenced by the wicks on the Japanese candlesticks.
6. Resistance Testing: The price has made several attempts to break above the 148 level, which seems to be acting as short-term resistance.
7. Support Holding: On the downside, the 146 level appears to be providing some support, with the price bouncing off this area multiple times.
8. Indecision Candles: Many of the recent candles have relatively small bodies with longer wicks, indicating indecision in the market and a struggle between buyers and sellers.
9. Reduced Momentum: Compared to the initial sharp decline, the recent price action shows reduced momentum and more sideways movement.

Support and Resistance Levels:

• Support: Immediate support is around 146.00 (20-period EMA) and 145.00 (recent swing low).
• Resistance: Immediate resistance is around 147.80 (50-period EMA) and 148.00 (recent highs).
• Major Resistance: Major resistance at the 200 EMA (152.97).

Breakout Levels:

• Upside breakout level: Above 148.
• Downside breakdown level: Below 146.

Moving Averages:

• The 10-period and 20-period EMAs are currently acting as support in the short term, while the 50-period EMA provides significant resistance.

MACD:

• The MACD suggests weak bullish momentum, but the overall trend remains bearish.
• A sustained move above the signal line could indicate a stronger bullish shift.

🤔 Potential Trade Scenarios

Is USD/JPY a buy or sell?

The following trade scenarios are provided solely for educational purposes. Since they don’t include full risk management practices, they are not intended to serve as actual trade recommendations, but merely food for thought to help you generate your own trade idea.

Long Bias:

• Entry Point: Consider entering a long position if the price finds support near 146.00 (20-period EMA) or 145.00 (recent swing low) and shows signs of a bounce, such as a bullish candlestick pattern or a positive divergence in the MACD. Additionally, a breakout above the resistance level at 148.00 could indicate a potential recovery.
• Stop-Loss: Consider setting a stop-loss below the support level of around 144.50 to manage risk.
• Target: Look for a move towards 150.00 and higher if the uptrend resumes.
• Rational: Targeting 150.00 is based on the previous resistance level and psychological significance. If the price manages to break above 148.00, it would indicate strong bullish momentum and the possibility of further upside.

Short Bias:

• Entry Point: Consider entering a short position if the price fails to hold the support level at 146.00 (20-period EMA) and shows signs of bearish momentum, such as a strong bearish candlestick pattern or the MACD histogram turning negative.
• Stop-Loss: Consider setting a stop-loss above the recent high at 148.50 to manage risk. This level is crucial as a break above it would invalidate the bearish setup.
• Target: Initial target could be the support level around 144.00. If bearish momentum continues, look for further downside towards 142.00 or lower.
• Rational: Targeting 144.00 initially is due to it being a psychological and historical support level. If the price breaks below this level, it would signal further bearish momentum and the potential for a more significant downside towards the next support level at 142.00.

📝 TAOTD Summary

• Current Position: The price is in indecision zone, testing the short-term EMAs and consolidating after a significant drop.
• Price Action: The price has been in a downtrend since mid-July, characterized by lower highs and lower lows. Recently, the price has found some support around 145.00 and is currently consolidating in the 146.00–148.00 range.
• Trend: The long-term trend appears to be bearish with the price below the 200-period EMA, but the short-term trend shows signs of recovery with prices above the 10-period and 20-period EMAs. However, the medium-term trend remains bearish with resistance at the 50-period EMA.
• Key Levels: Support at 146.00 (20-period EMA) and 145.00 (recent swing low), and resistance at 148.00 (recent high and 50-period EMA).
• Momentum: The MACD indicates weak bullish momentum, suggesting potential for a short-term recovery within a broader bearish trend.

In summary, while the recent price action suggests the overall trend is bearish, the recent consolidation and positioning near short-term EMAs suggest a potential short-term direction change hours continued consolidation.

Traders are likely watching closely for signs of whether this is a temporary pause in the downtrend or if it’s forming a base for a potential reversal.

The next significant move may come from a decisive break either above the recent resistance or below the support levels established in this consolidation phase.

You should monitor the behavior around the consolidation range and look for a clear break of the current range for potential trading opportunities

A break above the consolidation could signal a potential trend change, while a break below could indicate a continuation of the bearish trend.

Also, monitor the interaction of price with the shorter EMAs to help determine the next short-term direction within this larger bearish structure.

Remember, this analysis is based solely on the technical aspects shown in the chart. In real trading scenarios, it’s crucial to consider fundamental factors and broader market conditions such risk sentiment.