Technical Sentiment: Slightly-bearish
Key Takeaways
During Asian trading the US Dollar dropped against a basket of currencies, when sellers managed to temporarily shake buyers out of the market. Although USD stayed strong during European trading, a deeper correction might be in play for USD/JPY.
Technical Analysis
USD/JPY priced in fewer rallies during the second half of September, considerably smaller in size, as buyers encountered increasing pressure from the opposite side. Extreme overbought conditions coupled with insufficient corrections throughout this +800 pips upswing favor technical sellers at this point.
A large Bearish Engulfing Bar formed on 1st October could very well be the final straw, considering it is the first bearish price action signal in months on the Daily chart. On the same timeframe, Stochastic has entered overbought conditions since mid-August, so a temporary top is long overdue. USD/JPY is currently trading around 108.60, flirting with 23rd September Low at 108.23. If price breaks below this level, we expect this sell-off to accelerate again while traders seek a suitable Lower Low in the newly formed bearish swing configuration. Price should find a strong support at 106.50/63, where 38.2% Fib level will soon be strengthened by 200 Simple Moving Average on 4H timeframe.
Free Reports:
On the other hand, if USD/JPY consolidates in this region over several trading sessions, traders are advised to maintain a bearish bias while price remains below 109.10/20. This area represents a decent short-term pivot line where price might form a Lower High before a second bearish leg is triggered. We see USD/JPY bulls regaining control only above 109.20/40, paving the way back to 110.00 and above.
*********
Prepared by Alex Z., Chief Currency Strategist at Capital Trust Markets