USD/JPY short positions (futures) are where they were in October 2006 when the USDJ/PY rolled over from 119.87. Markets turn at extreme psychological states. Pessimism towards JPY is not where it was in February, but it is close. In other words, stretched short positioning indicates that the risk of a reversal is high. It will be interesting to see where positioning is after the COT report release later today. An increase in shorts would increase the probability of a reversal next week.
The daily chart shows that the USD/JPY recently broke through a former resistance line. This is called a ‘throw-over’ and often occurs at the end of a long move. A drop below the support line seen above (currently at 121.62 and increases about 12 pips per day) would signal the turn.
The reversal from 120.85 gives scope to a new high in a 5th wave. We would be confident in the bear side on a break below the potential support line drawn off of 117.60 and 119.46 (same as previous chart). Potential resistance is at the line drawn off of the 5/4 and 5/23 highs near 122.10 (increases about 18 pips per day). In summary, we expect a new high (above 121.86) followed by a reversal. Another scenario is that a more complex correction is unfolding from 121.86. In this case, a c wave decline would come under 120.85 and test the support line before an attempt on 121.86.
Jamie Saettele is a Technical Currency Analyst for FXCM.
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