USDJPY trend should be solidly down based on year to year, month to month price action but an uptick could change sentiment very quickly. These two charts explain why shorting USDJPY is becoming harder.
USDJPY trend still down but psychology could be shifting
I have two USDJPY charts here one in monthly time frame and the other in daily time frame. Based on both charts I say USDJPY is still in a down trend mode, that any trend following swing trader should be looking at a short only. However the monthly time frame chart should explain why going short the past 3 months have made little headway and in fact USDJPY could be retracing higher.
Price has to do a lot more before I would be persuaded to go long but let’s just say that in the mean time, shorting USDJPY is going to get a lot more difficult.
Chart #1 – Monthly time frame
- This monthly time frame chart of USDJPY shows year to year price action.
- Green boxes paint whole year price action for 2012, 2013, 2014, 2015.
- 2016 is painted in pink because it is a down year whereas the others were up years.
- From this chart, we can see that USDJPY can be described in very technical ways. If we look at 52-week highs and lows of 2014, 2015, and so far this year, these levels have been complied with very well.
- In my eye, year to year trend of USDJPY has solidly reversed and is in down trend mode after terminating previous year’s higher high, higher low sequence.
- Month to month so far is also favouring down.
USDJPY monthly chart, year to year range painted in coloured boxes
It is important to recognise based on this chart that although a trend following forex trader should be approaching USDJPY as a short, the sentiment is ‘oversold’. I did an experiment with my colleague
Let’s say that you went short USDJPY in January near to the high of this year, say 121 region, what would you do now?
It is easy to see why. USDJPY is at a clear and present support based on 2014 low. USDJPY has fallen an entire year’s range (2014) and is now sitting on support. It might or might not be falling some more but for a person who has captured an entire year’s move in 6 months would be felling jittery with every uptick because he’s a winner and a winner would be thinking of protecting his gains. Now if everyone had this psychology, any uptick in USDJPY is likely going to explode upwards. Not only are there speculators who are waiting to buy ‘cheap’, there would be a whole group of winners who would be covering their short, adding to buy pressure.
Are conditions present for an uptick?
Chart #2 – Daily time frame
This chart backs up many of the observations made in the monthly time frame chart. We can see month to month price action is down and again a trend follower should be selling, not buying. We can see also how price reacted to 2014 low in the last 3 months. Very importantly, there is a first uptick this month because the last 9 months of price action shows a sequence of lower highs and then suddenly the lower high sequence got terminated.
At this moment, this uptick could still be a fake move – it could be a bull trap, some kind of price action that was meant to trigger stop loss orders but it could also be a prelude to a bigger move higher.
USDJPY daily chart, shows month – month price action
What is the takeaway?
- Year to year, month – month, USDJPY is still in down trend mode.
- Price is currently sitting on a very prominent support that most of market should have spotted.
- Price has fallen an entire year’s range so winners should be feeling jittery, keen to protect profits.
- Any uptick could lead to short covering, short squeeze.
- One has a choice to go against the trend which could be foolish but staying with the trend (to short) could become difficult.
- An uptick has already appeared at the beginning of this month which has terminated the previous 9-months of falling price sequence.
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Soh Tiong Hum is Director of TerraSeeds Market Technician Pte Ltd. TerraSeeds is a trading educator in Singapore since 2005.
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"I do not have a financial advisor's license. I am not qualified by any regulator to give financial advice. I do not know you the reader. Your investment means and motive may be different from me. My posts here are based on observations and meant for education. I am not responsible for for any consequence from your actions."