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Hey! This is Philip with this week's trade idea of the Free Profitable Forex Newsletter!
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Risk Of "Buy The Rumor Sell The Fact" Price Action On USDJPY
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Less than two weeks have passed since the most severe escalation between the US and Iran in 40 years, and stock markets and other risky assets are already roaring higher in celebration.
While that is undoubtedly great for stock investors (and for Trump also as he has more to brag about ahead of the November Presidential Election), the risks here for a crash are dangerously increasing with every tick higher in US stocks.
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- Yes, the US and China are signing the phase 1 deal today, but don't forget that it is a modest deal only.Â
- Geopolitical tensions remain elevated and could escalate again at any moment without prior notice.Â
- Lastly, equities (by this, I mainly mean US stocks) are currently at historically overvalued levels according to several indicators, which means that there is much greater room for stocks to move to the downside from here than there is to the upside.
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110.00 Resistance Is Major
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So, given all of the above, it's fair to say that getting bearish on risky assets would be a prudent attitude right now. Or, if not fully bearish, at least, neutral and very cautious.
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Turning to USDJPY, add to the above the fact that USDJPY is trading right at the critical 110.00 resistance area. Thus, it's easy to see how the pair could head lower from here.
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USDJPY has also been rallying in tandem with stock markets on the anticipation for the finalization and signing of the phase one US-China deal. However, as is often the case with such events (and especially when markets are at such stretched levels), there is the big risk of "buy the rumor sell the fact activity" on this signing of the US-China phase one deal. Of course, such a scenario would most likely trigger
a reversal on USDJPY too.
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As we said above, the technicals are also supportive of a reversal and can turn bearish at this point. The idea is to wait for a bearish pattern/signal to occur, which will confirm the 110.00 resistance here. The daily chart would be suitable for this setup, and below, we take a look at it with the key technical levels/zones shown.
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- Look for a bearish pattern/signal on the daily chart. Yesterday's candle already indicates that the resistance is holding. If today's candle closes in the red, it will form a small bearish engulfing pattern. In a purely technical sense, this would be a bearish signal here.
- So, a short entry here near 110.00 or slightly below would be appropriate.
Stop loss:
- Behind the high of the entry pattern.Â
- The 110.00 resistance area is the defining point here. However, keep in mind that the price can pierce such levels noticeably before reversing.
- So, if the entry pattern is near 110.00, then be sure to place the stop slightly higher.
Target:
- 1st - the 108.50 price zone, also a support trendline as shown in the chart
- 2nd - 107.00, an important support zone in the past
- 3rd - 105.00 monthly support (if a major bear trend develops)
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Note: This setup would be canceled in case of a runaway powerful bullish breakout through the 110.00 resistance (although improbable it has to be taken into consideration as a possible scenario).
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P.S. A few words on our previous USDJPY trade idea (which was sent on December 5 last year): The wedge formation we were following then is shown on this chart here too, and how in the end, this trade would have worked, although that happened in the midst of the holidays. However, we abstained from trading in that period.
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Trade signals from the past weeks
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TOTAL: +0 pips in the past week
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TOTAL: +2490 pips profit since October 1, 2018
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Thank you!
High Risk Warning: Please note that foreign exchange and other leveraged trading involves significant risk of loss. It is not suitable for all investors and you should make sure you understand the risks involved, seeking independent advice if necessary.
Any opinions, news, research, predictions, analyses, prices or other information contained in this newsletter is provided as general market commentary and does not constitute investment advice. FX Trading Revolution will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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