USD/JPY edged north yesterday, breaking above the key resistance (now turned into support) territory of 113.15. The move signaled the completion of a failure swing bottom formation and after stalling for a while slightly above 113.15, the rate jumped again to hit resistance near 113.65. In our view, the completion of the failure swing pattern, combined with the fact that USD/JPY continues to trade above the medium-term upside support line drawn from the low of the 29th of May, suggests that there is scope for some more recovery.
A clear and decisive break above 113.65 could confirm the case for further advances and may encourage the bulls to place the 114.00 zone, marked by the peak of the 14th of November, on their radar. If they prove strong enough to overcome that hurdle as well, then we may see them driving the battle towards the peak of the 12th of the month, near the 114.20 area.
Taking a look at our short-term momentum studies, we see that the RSI has topped within its above-70 zone and moved back below 70, while the MACD, although above both its zero and trigger lines, shows signs of slowing down. These indicators detect slowing upside speed and suggest that a small setback may be in the works before the next positive leg, perhaps for a test near the 113.40 level, or even the neckline of the failure swing, at around 113.15.
That said, we would like to see a clear dip below 113.15 before we start examining the cancelation of the failure swing. Such a move may signal that the bears have gained control in the short run and may open the way for the 112.70 territory. Another break below 112.70 could extend the slide towards the 112.30/40 zone, or even the medium-term upside support line taken from the low of the 29th of May.
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