USD/JPY Reversal Top Could Be Early Sign of Momentum Shift

The Dollar/Yen finished lower on Friday for the first time since March 17 after hitting a more than six year high early in the session. The Forex pair traded lower early in the session, but rebounded late in the day when the 10-year U.S. Treasury yield hit a fresh two-year high, however, not enough to put in a new intraday high.

The formation of a closing price reversal top suggests momentum may be getting ready to shift to the downside. Furthermore, the Dollar/Yen did not hit a new high when Treasury surged into the close. This could be an early sign of a bearish divergence.

The price action does not suggest a change in trend is taking place, but it could be an early indication that the selling is greater-than-the-buying at current price levels. If anything, it could be sign that investors are starting to book profits and lightening-up on the long side.

On Friday, the USD/JPY settled at 122.093, down 0.266 or -0.22%. The Invesco CurrencyShares Japanese Yen Trust ETF (FXY) closed at $76.76, up $0.12 or +0.15%.

The USD/JPY has been on a bullish tear since March 4 with the U.S. Federal Reserve hiking rates and pledging to be more aggressive in battling inflation, while the Bank of Japan is expected to keep its soft monetary policy in place.

Daily Swing Chart Technical Analysis

The main trend is up according to the daily swing chart. However, the formation of a closing price reversal top suggests momentum may be getting ready to shift to the downside.

A trade through 122.437 will negate the closing price reversal top and signal a resumption of the uptrend.

A move through 121.181 will confirm the closing price reversal top. This won’t change the trend, but it could trigger the start of a minimum 2 to 3 day correction.

The short-term range is 114.651 to 122.437. Its 50% level at 118.424 is the primary downside target.

Short-Term Outlook

On Friday, the USD/JPY posted a higher-high, lower-close and close below the opening. This is a potentially bearish chart pattern. However, if it had closed below the mid-point of the trading session at 121.809, we’d have more confidence in the start of a correction.

Nonetheless, taking out 121.181 will not only confirm the chart pattern, but it will also break the 13 out of 15 day pattern of higher-highs and higher-lows.

No one is saying to short the market, but if you’re long, you may want to consider moving up your stops because if the USD/JPY starts to turn to the downside, there is plenty of room to fall with 118.424 the next support level.