THE Japanese yen has been among the worst performing currencies against the US dollar since the start of 2022 which saw the USDJPY currency pair soar from 115.06 to a 22-year high at 151.939 on Oct 21, 2022. Upon hitting the peak, USDJPY retraced and formed a bearish descending triangle where prices broke down steeply on Nov 10. In this article, we will highlight a few key technical observations that point to a deeper retracement in USDJPY.
One of the more telling signs that the intermediate-term trend has turned bearish is the crossover of the 20-day exponential moving average (20 EMA) below the 50-day exponential moving average (50 EMA). In a bullish trend, the 20 EMA would be above the longer-term 50 EMA, vice-versa. The bearish crossover signals a shift from bullish to bearish trend and traders can anticipate further downside in the medium term. It is worth noting, however, that the broader long-term uptrend in USDJPY has yet to be invalidated as the 50 EMA still sits above the long-term 200 EMA.
Secondly, the formation of a bear pennant pattern on the daily chart following the breakdown from the descending triangle builds a convincing case that the bears are in strong control. A bear pennant can be identified when prices consolidate in a triangle pattern (the pennant) following a steep decline in prices (the pole). This chart pattern is normally a bearish continuation pattern where prices have a high tendency to break down from the pennant after a brief period of consolidation. Upon the breakdown, traders can forecast a downside technical target that is as deep as the height of the “pole”.
In terms of technical indicators, both the Relative Strength Index (RSI) and the Moving Average Convergence Divergence (MACD) echo the same bearish sentiment. Since the start of November, the RSI has slipped below the neutrality area of 50 and dipped to a two-year low when the reading went into oversold territory on Nov 11. At the time of analysis on Nov 18, the RSI reading remains bearish around 34. On the other hand, the MACD line is also below the signal line and deep in negative territory not seen since 2016.
The odds of a steeper retracement in USDJPY are high as various technical setups suggest a continuing bearish trend. Looking ahead, the immediate support for the pair is the lower band of the pennant around 139 (S1). In the event of a successful breakdown from the pennant, the next support level lies at 137.7 (S2). If prices continue to breach below S2, traders could expect further downside to 135.5 (S3) and the bear pennant technical target around 130.82 (S4). In the alternate scenario of a rebound, 141.6 (R2) and the 20 EMA would provide resistance for the pair.
(Source : Reuters) , all rights reserved by original source.