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USDJPY breaking out of the wedge?
We have discussed the wedge formation on USDJPY a number of times already in our weekly analysis, and it seems that the time for a breakout may be finally here.
Earlier this week, we saw a nice plunge in USDJPY that broke the support trendline of the wedge on the daily timeframe (see chart). However, USDJPY wouldn’t be USDJPY if the price action isn’t slow and largely choppy. So, yesterday, the bearish momentum faded, and the pair even bounced on the daily chart - confirming another rising support trendline (also see chart).
Nonetheless, the bearish moves from the early part of the week direct us to look for selling opportunities on USDJPY now.
And from the technical perspective, there are two ways that would be prudent to do that.
- If USDJPY continues higher to test the broken support trendline of the wedge, then look for selling opportunities on this re-test. Bearish patterns on the daily and also intraday charts could provide a very nice entry point.
- On the other hand, if USDJPY doesn’t continue higher and instead breaks lower, then look for a breakout of this second support trendline. This would be an appropriate short entry in such a scenario.
Watch out for this second trendline (blue on the chart) as there is the risk that it may hold and USDJPY to continue bouncing off it. The probabilities, of course, favor a bearish breakdown and extension of the move to the downside.
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- Scenario 1: wait for a re-test of the broken resistance trendline of the wedge, currently toward 109.20 and rising; Then look to sell on bearish pattern or signals here.
- Scenario 2: if scenario 1 doesn’t occur at all, then USDJPY may break the second support trendline (currently around 108.50). This would be a good entry also as it will confirm a top in USDJPY and a definite breakout of the wedge.
Stop loss:
- Will depend on which of the scenarios above is triggered;
- In either case, look to place a relatively small stop based on the entry setup;
- Slightly above the most recent swing high to the left would be the basic way to place the stop in either scenario;
- The 109.75 top that was established should definitely hold (on a daily close basis) if USDJPY is going to drop lower
Target:
Fundamentals and sentiment may turn in JPY’s favor too
The fundamental aspects also seem to be turning in favor of the Yen (bearish USDJPY).
The fact that US-China headlines getting more volatile - Trump saying everything’s going great one day and then the next day says a deal may have to wait after 2020 elections (another full year). Such positive-negative flips in the remarks may be a sign that negotiations are about to breakdown again, in which case stocks will slide, JPY will strengthen, and USDJPY will fall.
On this front, the markets are particularly focusing on whether December 15 tariffs will be called off or go into effect as this date approaches. Expectations are for the tariffs to be delayed (in line with making a deal), however, if that doesn’t happen and tariffs do take effect, then risk appetite will likely be hurt.
Finally, of course, we have the Non-Farm Payrolls on Friday. This week’s U.S. data was nearly all weaker than expectations, and if the jobs and NFP reports are also weaker, that is likely to be enough to push USDJPY lower. And once the technical levels breakdown, it shouldn’t take much before USDJPY trades at 107.00.
Trade signals from the past weeks
- November 08, 2019 - Long NZDCAD from 0.8385, 1st target reached this week (December 02) at the 0.8650 zone = +265 pips profit
TOTAL: +265 pips in the past week
TOTAL: +2490 pips profit since October 1, 2018
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