After hitting a low of 81.08 last February 4, the USD/JPY pair has rallied back to mark a high of 83.97 2 days after Valentine’s day. It appears, however, that US dollar’s push against the Japanese yen is starting to lose some momentum. As you can see from its 4-hour chart above, the pair has formed what looks to be a head and shoulders pattern with a neckline at around 83.10. In the process of doing so, it likewise broke its short term uptrend line. After breaking the uptrend line, the pair immediately fell towards the neckline of the head and shoulders. Notice that this neckline corresponds to the previous highs that I highlighted in pink. Anyway, should USDJPY clears below the said neckline support, it could further fall down to around 82.50.
While the price is suggesting a likely fall in USDJPY’s price, a presence of a hidden bullish divergence, where the price registers higher lows and the stochastics make lower lows, is saying otherwise. For those who do not know, a hidden bullish divergence as in this case signals a probable pick up in prices. Hence, if USDJPY is able to rebound off the head and shoulders’ neckline, it could once again reach the peak of the right shoulder at around 83.50.
But what’s the safer play, if you ask me, given this set-up? If it’s me, I would follow first what the price action is saying before I look at the other indicators. The recent price price suggests a likely fall given the formation of a head and shoulders. So what I would do here is that I will wait first for the breakdown to happen. At that time the hidden bullish divergence will be still in effect. Sooner or later the pair will rebound and when it does, I will short it (buy the yen and sell the dollar) probably at the neckline area or any Fibonacci retracement levels from the peak of the right shoulder and the first significant swing low that it will make following a breakdown.
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About Ron Acoba (http://www.laidtrades.com)
Ron Acoba is the co-founder and managing partner of Laidtrades.com. He has a total of 8 years experience in the financial market. Technical analysis is his main tool in forecasting price action of equities and forex but also versed in pricing underlyings with the use of models such as CAPM, dividend discount and the like. Ron has an MBA degree and presently is pursuing a CFA and a CMT charter.