There are two general considerations for technical analysis: levels and market conditions. So while, USDJPY looks to be a stable range due to prominent head-and-shoulders formation backed by a considerable array of support; there is still substantial risk derived from the momentum of the past four sessions and the knowledge that same pattern often ends with a breakout and reversal. Therefore, while this is a viable setup, a strategy to trade it should come with rules and precautions.
Why Would USDJPY Hold a Range?
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· [B][U]Levels to Watch:[/U][/B]
[B]-Range Top: 99.60 (Pivot, Shoulder)[/B]
[B]-Range Bottom: 95.65 (Neck, Fib, Trend, SMA)[/B]
· There is more standard, fundamental interest in USDJPY than one may expect. Over the coming week, high-level data will be released from both dockets to monitor whether the US and Japan are leading or lagging the forecasted recovery. Indicators of particular concern are the US consumer confidence and Japanese GDP numbers. With this accounted for though, there is always the threat of an unforeseen catalyst through risk trends.
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· Technical levels are clear; but market activity for USDJPY is dangerously vague. Setting the scene, this pair is at the ‘neckline’ in a broader head-and-shoulders formation. Support around 96.50/75 is well documented with repeated tests, a long-term Fib and rising trend. However, this is also a reversal pattern and momentum has yet to fade.
[B][I]Suggested Strategy[/I][/B]
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· [B][U]Long[/U][/B][B]: Half-sized entry orders will be placed at 95.90 which is aggressive but near spot.[/B]
· [B][U]Stop[/U][/B][B]: An initial stop of 95.00 is wide but necessary to cover volatility that we have seen. To secure profit, move the stop on the second lot to breakeven when the first target hits.[/B]
· [B][U]Target[/U][/B][B]: The first objective equals risk (90) at 96.90 and the second[/B][B] target will be set to 98.20. [/B]
[B]Trading Tip[/B] – There are two general considerations for [technical analysis](http://www.dailyfx.com/story/bio2/Currencies_Offered_as_Uncertainty_Creeps_1242228411136.html): levels and market conditions. So while, USDJPY looks to be a stable range due to prominent head-and-shoulders formation backed by a considerable array of support; there is still substantial risk derived from the momentum of the past four sessions and the knowledge that same pattern often ends with a breakout and reversal. Therefore, while this is a viable setup, a strategy to trade it should come with rules and precautions. To start off, current spot allows for an aggressive entry. This is fortunate as it allows for a relatively wide stop and a first target that can be tagged on a quick reversal. The suggested stop is set well below the collection of support and covers the potential for a volatility spike lower before a reversal (like we have seen happen in the past around this level); but it is still notionally large. To lower the outright risk on this position, we are using half our normal entry size. As this setup is playing out right now, it should either confirm a reversal or unfavorable breakout very soon. If we see an immediate breakdown, our order will never trigger. What’s more, we will cancel all pending entry orders by the middle of the US session. As a precaution, we will exit all active positions before the weekend. On a side note, if we do see a confirmed, bearish break develop; it would mark a very attractive setup for an extended decline with the potential to support wide targets.
Event Risk for US and Japan
US – Scheduled event risk and general trader sentiment are the two dominant concerns for dollar traders over the forthcoming week. However, the general pace of risk appetite/aversion is coasting off of the trends that have developed over the past few weeks and months. There are no indicators that threaten to single-handedly alter the course and temper of sentiment all on their own. As for standard indicators, there is data that is market-moving; but little that can profoundly alter the long-term outlook for the US (the primary concern for fundamental traders at this point). For the remainder of the week, Friday’s round of data offers the best chance for event-based activity. Inflation no longer has its monetary policy pull; but the consumer confidence figure gauges the health of the nation’s largest sector. After the weekend, housing starts and the FOMC minutes will report on trends that are already well-established.
Japan – Normally, standard Japanese economic releases have little influence on the direction and pace the Japanese yen takes; but with the world’s second largest economy suffering its worst recession in a quarter of a century and facing questions about its ability to offer safe haven, we have seen fundamental traders showing greater interest. Looking for indicator-based volatility before the weekend; only the only the machine orders figure has any tout. More influential is next week’s GDP release. A forecasted expansion of the economy’s recession could severely undermine the yen’s position as one of the market’s foremost safe haven currencies and significantly chance the currency’s role in the FX market. Aside from that, we will keep our ear to the ground for risk trends.
[B]Data for May 14 – May 21[/B]
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[B]Data for May 14 – May 21[/B]
[B]Date (GMT)[/B]
[B]US Economic Data[/B]
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[B]Date (GMT)[/B]
[B]Japanese Economic Data[/B]
May 15
CPI (APR)
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May 14
Machine Orders (MAR)
May 15
U. of Michigan Confidence (MAY P)
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May 18
Consumer Confidence (APR)
May 19
Housing Starts (APR)
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May 19
Housing Loans (YoY) (1Q)
May 20
FOMC Minutes
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May 19
GDP Annualized (1Q P)
Written by: John Kicklighter, Currency Strategist for DailyFX.com
Questions? Comments? Send them to John at <[email protected]>.