The USD/JPY pair bounced off of the 78 handle during the session on Monday in order to form a good looking hammer for the session. This suggests to us that the 78 level will continue to offer serious support for the pair, and that we are more than likely going to bounce from here and trying to reach the 80 handle again.
As you undoubtedly know by now, the Bank of Japan is active in this pair and we think that the 78 handle will be a bit of a “line in the sand” for the Japanese central bank. Because of this, the only direction we would go from here is long anyways, and the hammer certainly adds a lot to the list of reasons to be buying this pair, not selling it.
On a break of the hammer for the session, we think that buying this pair is the prudent way to go. Certainly, the Bank of Japan will not mind this pair rising, and the Federal Reserve probably doesn’t care one way or the other. The fact that the 78 handle was touched and the markets bounce so aggressively makes us wonder if there isn’t some kind of clandestine buying by the Bank of Japan. They have admitted to doing exactly the same thing previously.
The real test, the 80 handle for the bullish trader, as it should offer significant resistance. If the market can somehow get above that, this pair will target 80.60, and then of course much higher as that is the last vestiges of serious resistance in the area. We suspect that if we get above that level, the 84 handle will be targeted.
As for the downside, we simply cannot do it as the Bank of Japan is very likely to intervene if we get much lower than the Monday lows. Looking at the longer-term charts, there is a ton of support below there anyways, so certainly we don’t want to sell into it. For a longer-term perspective we still believe that the buying of this pair is probably the correct route to go.
Written by FX Empire