USD/JPY Reversal Bottom Could Set Bullish Tone for 2 to 3 Days

The USD/JPY backed off from an 18-month low on Tuesday, with the Japanese Yen losing some steam after its sharp rally since last week. Buyers took advantage of thin market liquidity, with Japanese markets closed on Wednesday and Thursday for public holidays.

Technically, the USD/JPY produced a potentially bullish closing price reversal bottom. This chart pattern typically leads to a 2 to 3 rally, often equal to at least 50% of the last break. The chart pattern was confirmed earlier in the session when the Forex pair traded through 106.671.

The main range is 111.879 to 105.543. Its retracement zone at 108.711 to 109.459 is the primary upside target. If all goes as planned, we should see a test of at least 108.711 by Thursday or Friday.

Based on yesterday’s close at 106.597 and the earlier price action, the direction of the market today is likely to be determined by trader reaction to 106.671.

A sustained move over 106.671 will signal the presence of buyers. The buying may be fueled by short-covering, profit-taking or even aggressive counter-trend buying.

The first upside target is the steep downtrending angle at 107.879. We could see selling on the first test of this angle, however, it is also the trigger point for a powerful acceleration to the upside. Taking out this angle with conviction could trigger a rally this week into at least 109.711. This is followed by the Fibonacci level at 109.459 and a downtrending angle at 109.879.

The inability to sustain a rally over 106.671 will indicate that the buying is weak and that sellers are trying to regain control. This could lead to a pull-back into a series of uptrending angles at 106.543, 106.043 and 105.793. Taking out 105.543 will negate the chart pattern and could trigger an even deeper break.

Watch the price action and read the order flow at 106.671 on the downside and 107.879 on the upside. Trader reaction to these two levels will tell us if the selling or the buying is getting stronger, respectively.