USDJPY: Prices need to break below 110.36

UPON reaching a high of 118.71 in December 2016, USDJPY has been caught within a 600 pips range, fluctuating between the lower 107.95 level and the unrelenting ceiling of the 114.55 level. At the end of September 2018, USDJPY once again approached the well-respected resistance level, and is now experiencing a mean reversion towards the downside.

The range appeared to be broken on the 2nd week of February 2018 after being sustained for a whole year, and bottomed out at 104.55. Shortly after, the bulls regained control with a sharp reversal, whipping prices back to the historical ceiling at the 114.55 level. Hence, we believe the breaking of the range was not indicative of a change in trend, but rather, it is undergoing what is known as a range expansion.

In this case, the Weekly Stochastics Oscillator seems to work extremely well in spotting a mean reversion to the low when the oscillator rises above 80. Stochastics Oscillator is a directional indicator as well as a measure of momentum. A reading above 80 signifies an overbought condition while a reading below 20 represents an oversold condition. Do note that it is not meant to be used in isolation but in tandem with other factors to attain confluence, thereby, adding confirmation to a forecast.

A deeper analysis of the chart reveals that the stochastic oscillator pierced past 80 at the final week of September 2018 which indicates an overbought condition; a promising sign for an impending price reversal as it had occurred multiple times (as shown by the red arrows). On the price action, the formation of a shooting star pattern may be observed, with the candlestick closing below the key resistance level. This is a classic transitionary candlestick pattern, representative of the bears clearly defending the level, taking out the initial bulls' effort in bringing prices higher. Hence, it is of no surprise that a reversal followed suit.

Based on the span of the range, we can expect USDJPY to ease off and test the 107.95 level, followed by the 104.55 level. From a nearer-term perspective, some supply might be resting on the 110.36 level, potentially capping the down level, potentially capping the downward momentum. For USDJPY to convincingly turn the tide and return all the way to the bottom of the range, prices need to break below 110.36, to flush out remaining buyers until it is met with another huge cluster of demand from buyers residing at the bottom of the range.

Disclaimer: Chartpoint is provided by Phillip Securities Research for information only, and should not be construed as investment advice.