USDJPY eyes major breakout

USD/JPY eyes major breakout

Within weeks, USD/JPY is set to complete a long-term technical pattern followed by a dramatic ‘break-out’.

Background: a dollar peak

Between 12th February and the end of last month, the dollar index saw a rising cycle that peaked just above 95. It came on the back of a rout in U.S. Treasury bonds as investors rushed to price chances that inflation – and hence Fed rate hikes – could outpace market expectations. The index failed to hold above the cycle peak though and has opened its second week on the back foot. A sustained break of last week’s 93.717 low may be an early warning that the reversal could become an extended decline. However, if the index pulls decisively above that price, it would suggest recent weakness was more of a consolidation.

Technical pattern: symmetrical triangle

Depending on which way it goes, the verdict could corroborate a clear long-term pattern that looks to be completing in the dollar traded against the yen, as shown in the chart below. Known as a symmetrical triangle, the motif is typically, but not always bullish. In this case, the lower line of the pattern rises from the USD/JPY close in the week ending (w/e) in January 2013. The trend line is validated by weekly lows skimming it several times afterwards including between June-September 2016 and w/e 23^rd March-w/e 30^th March 2018. The top line of the triangle is a descending trend connecting numerous highs since w/e 5^th June 2015- w/e 25^th May 2018.

Theoretical target

As price approaches the apex of the triangle, in theory there will be a ‘break-out’. As the pattern is usually bullish, that break should be to the upside of the pattern. Again, according to theory, the target of the resultant up move will be equal to the widest distance between the trend lines. In USD/JPY’s case, the descending trend line begins no earlier than w/e 5^th June 2015. We measure from the high that week—125.85—vertically to the point at which it bisects the rising trend line, at 96.28. The distance is 2,957 pips. To help us visualise that distance, we can note that a corresponding move from current levels would take the dollar index well above 130 in the long term.

Trading pointers

To ensure the direction of a break out is clear, traders commonly wait for price to close above clearly defined markers. In the case of this pattern, that would mean either above the rising trend or below the falling trend. It’s worth remembering that most technical analysis strategies provide approximate guidelines rather than exact pointers. To capitalise on a longer-term pattern, traders will need to take the key point from it and bear it in mind during shorter-term trading, until the that long-term assumption becomes invalid. For instance, an assumption that the overarching USD/JPY direction points higher can inform a bullish stance in a shorter-term time frame, as per our second chart. So long as USD/JPY’s more recent trend line is intact, and price is below key resistance, we should be more inclined to buy.