The USDJPY is coiling for a significant break and the technical analysis points to higher levels. This article focuses on a potential bullish case for the pair and how should bulls position to take the most out of the upcoming trend.
A mandatory condition for a bullish flag is a vertical move before the flag’s formation. In this case, the vertical movement is the strong bullish reaction the pair had when President Trump got elected one and a half years ago.
Typically, the USDJPY is correlated directly to the United States equity. The direct correlation between the USDJPY and the DJIA (Dow Jones Industrial Average) comes from the inversed relationship between risk appetite and the JPY.
When investors want to buy U.S. equities, they borrow in JPY as the interest rate is meager. With the JPY they buy the USD to pay for the stocks. Hence, the USDJPY moves higher together with U.S. stocks. Apparently, the opposite happens in a selloff.
Because most of the trading nowadays is automated, the transactions happen with the speed of light, and the reaction is almost simultaneously.
Therefore, the jump in the USDJPY as you can see below came when the DJIA and the general U.S. stock market exploded higher as a result of Trump’s election.
What Makes a Bullish Flag
Despite the upward move suggesting the poll of a flag is in place, the pair only drifted lower. The consolidation that followed, as it can be seen in the chart above, took over one and a half years to form.
And, all this time, the pair decoupled from the DJIA correlation. In fact, the U.S. equities moved much higher, while the USDJPY corrected. As such, we can say that when the correlation kicks in again, it’ll send the USDJPY higher, blowing some wind in the bullish scenario.
A bullish flag is a consolidation. It can form on the horizontal, but also drifting lower like is the case here.
Obviously, the bigger the timeframe, the more time it’ll form to break. What matters is to focus on the series of lower highs. And, on the potential continuation patterns
When the market will break the lower highs series, we can consider the flag to be broken. Effectively, for a valid break, bulls need something like this:
The current lower highs series is not broken yet. For it to be broken, the price must close and hold above the blue line visible in the chart above.
The signs are positive for bulls: a pennant as a continuation pattern forms for quite some time now (more than a trading month). For this reason, the chances are that the price just builds energy before breaking higher.
A move above 111.50 should trigger some stops. The next logical target is 116.24 and 120, providing the 110 level won’t be revisited anymore.
If the triangle that now looks like a pennant will break lower, expect the price to find support at a dynamic fifty percent retracement level of the descending channel.
This article was written by AMarkets
This article was originally posted on FX Empire
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