USD/JPY Technical Highlights:
- USD/JPY rising wedge formation continues to develop
- The pattern has done a little shape-shifting, but becoming mature now
- Outcome of a breakout is likely to lead to sharp move
Not long ago I looked at a rising wedge forming in USD/JPY, and it had a slightly different shape to it than it does today. Wedge patterns can be tricky in both their development and how price behaves around the apex.
The ‘shape-shifting’ was only modest and required that the lines be expanded by a minor amount, but nevertheless the integrity of the rising wedge is well intact. In fact, the pattern we are seeing now is more mature and has a cleaner look to it than just a couple of weeks ago.
A powerful move appears imminent.
Often times when rising wedges form after an extended rally (in this case) they can lead to a sharp reversal once the underside trend-line of the pattern break. The declining size of the price swings that make up the pattern while still traveling in the direction of the prevailing trend show a lack of momentum and signal complacency. When the wrong-way crowd is caught flat-footed an unwind can unfold rapidly.
The first step to confirm a downside break, in addition to a breach of the underside trend-line, is to see some form of near-term support break. The level I’m looking at right now is 13700. A close below this prior peak could help trigger momentum that gets the price rolling downhill quickly.
There is slope support to first watch from March, but it hasn’t yet been confirmed so it may not offer any real support given the larger break at hand. The first big level to watch is in the 13100s, the June 16 low and April high. There is, however, potential to reach the 12600 area once all said and done, the bottom of the rising wedge formation.
On the flip-side, should we see USD/JPY break out of the pattern to the top-side there are a couple of scenarios that could play out. The first is that we see price slightly break and then fail, which could lead to the underside trend-line break and thereby confirming a bearish break following a head-fake.
The second scenario is that we see a sharp squeeze that runs USD/JPY towards the 1998 high at 14767. While near-term momentum would obviously be bullish, breakouts of rising wedges to the top-side, whether they are small or lead to a strong squeeze, are typically short-lived and signal the end of a move before a large reversal.
With that in mind, any way we slice it the rising wedge suggests USD/JPY may be in for an extended period of weakness soon. Again, it could come from around current levels or after a squeeze higher first.
Note that we could see a couple of small head-fakes around the apex before a move gains momentum. The way I play these patterns, is go with the break and if price reverses then adjust accordingly through stops and re-entries.
USD/JPY Daily Chart
USD/JPY Charts by TradingView
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—Written by Paul Robinson, Market Analyst
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