(MENAFN- DailyFX) USD/JPY Technical Highlights:
- USD/JPY continues to form a large rising wedge pattern at 20-yr highs
- If the underside trend-line breaks look for a big sell-off to ensue
- Top-side breakout looking less likely and if it does would be perhaps a last 'hurrah'
USD /JPY price action continues to funnel higher into a rising wedge pattern that is looking more and more like it will lead to a big sell-off. The contraction in volatility at increasing levels leads to instability that is set to change towards a strong move.
These patterns within the context of an uptrend can lead to a squeeze higher, but typically they prove to be a short-lived move that then leads to exhaustion and a reversal. So even if we see USD/JPY trade higher, it will be looked at with a skeptical eye. Especially given how far it has run this year and where it currently trades.
USD/JPY is also trading around the 2002 high, and that makes for good confluence between a pattern and price level. Even though we have seen the 2002 high breached, given its duration you have to leave it some room. Bottom line is long-term resistance is still in play.
To officially trigger the pattern on the downside, a daily close below the underside trend-line of the pattern needs to occur. Ideally, we also see price close below the most recent low within the pattern at 134.26.
Should we see the break unfold the first level to watch is in the 1.31s, but ultimately looking towards the bottom of the wedge around the 2015 high of 12585. Even if USD/JPY is to continue to much higher levels, a correction of this size wouldn't ruin that outlook.
If we see a breakout to the top-side, as mentioned already, failure risk is high. As far as trading these, one can follow the breakout with that in mind on a long position, or if waiting for a potential short one could wait for price to fail back inside the pattern and take out the underside trend-line. These top-side failures can lead to even stronger moves than if price were to simply fall out of the pattern.
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---Written by Paul Robinson, Market Analyst
You can follow Paul on Twitter at@PaulRobinsonFX
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