Forex Technical Update August 13, 2010
 USD/JPY - Assessing the Reversal Scenario
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  • 1H: The USD/JPY is behaving as anticipated during this week's the Chartist Corner Strategy Session. Basically, a possible count was developed, and we were in wave 3 on Thursday. Wave 3 however has not finished its impulse until today.
  • The projection for wave 3 was 161.8% expansion of wave 1, which was 86.12 area. The market reached 86.20 and declined, possibly now into wave 4.
  • If the market is to have a successful reversal, it should not break below 85.40, since wave 4 should not cross wave 1. If it does, this is not an impulse wave and therefore not the start of a bullish attempt.
  • The RSI should also stay above 40.
  • Let's look at the daily and weekly.

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  • Daily and Weekly: The daily shows a reversal candlestick combination this week as the market hammers at the 84.80 low, shared by the low in Dec 2009. The market is channeling down. There is a small and a large channel. The smaller channel has resistance near 61.8% retracement of the latest downswing which is the 86.88 area.
  • That is a confirming sign for USD/JPY bulls. However, there is a significant resistance zone in 88.00/88.60.
  • This is the area just above the larger channel resistance. The 50-period simple moving average is also near the channel resistance.
  • The cluster of resistance factors includes 38.2% retracement at 88.68, and previous support, now tested as resistance. This is more clearly seen in the weekly chart.
  • The USD/JPY is an example of a pair that is in a long stretched bullish divergence. However, each time the RSI in the weekly tests the 60 area, the price level was successively lower.
  • This type of action is called the negative reversal, and suggests there is further bearish action. In my opinion this suggests further exhaustion as well. That means, its only a matter of time when this divergence does eventually materialize into bullish momentum.
  • There is a short-term bullish bias in my opinion towards 88/88.60. But if that breaks, the market can rally to the 91.00 area.
  • This should be a very pivotal point for the long-term view of USD/JPY since the wedge we are in would then finish 5 waves (a possible complete count of the pattern, or else 7 waves.)

  Fan Yang
Currency Analyst
Commodity Trading Advisor

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All screenshots are made from VT Trader 2.0 and are of actual market data at the time of the screenshot.