This post was prompted by an article I read this morning suggesting the USD/JPY is flashing a warning signal for stocks. Whilst I understand that the retreat with Yen pairs is causing wide-spread concern about the health of global markets I’m wondering, rather humbly I might add, if this current Yen movement is just a natural pullback after a rather lengthy rally more so than anything else?
Rallies, like the ones the Yen pairs have been on over the last couple of years, do not extend in straight lines forever and pullbacks are to be expected. Fibonacci retracement can help traders select potential targets for any pullback move from the self-fulfilling prophecy perspective. It’s not some form of magic at all but, given that so many traders focus on this tool, it does often become self-fulfilling. Popular retracement levels include the 50%, 61.8% and 78.6% but the 61.8% is often viewed as the ‘line in the sand’ level for any market move. That is, a pull back to the 61.8% but a hold above this level suggests that the major directional move is still intact. If the 61.8% fib is broken though then that move is considered to be completed and, possibly, even reversed.
USD/JPY monthly: this pair had a lengthy rally from 2011 until 2015 where it put on almost 5,000 pips. Price action to date has only retraced just over the 23.6% level so, as far as a pull back goes, this has a lot more room to move before the trend might be considered over. I note that even just a 50% pullback would bring price down to a previous S/R level at the 100 region and this would also shape up a decent inverse H&S pattern. Thus, for me, a pullback to the 100 level would be quite a healthy technical event even as part of a continuation move. Any break of 100 would suggest deeper falls of course but we’ve still a fair way to go to get to the 100 level:
EUR/JPY monthly: this pair rallied from 2012 to 2014 and put on 5,600 pips. Price action has pulled back to just above the 50% fib but the 61.8% fib is near long term S/R at 115 and so I’d be expecting a test of that region as part of any healthy pull back. A break of this region would be a deal-breaker here though and I’d then be looking down towards the 78.6% fib near the 105 region as that is previous S/R as well:
GBP/JPY monthly: this pair rallied from 2011 to 2015 and put on around 8,000 pips! Price action has almost pulled back to test the 50% fib but the 61.8% fib could draw price in as well. Any close and hold below the 61.8% fib would suggest a change of trend:
AUD/JPY monthly: this pair rallied from 2008 to 2013 and put on around 5,000 pips. Price action has pulled back to the major 80 S/R level which happens to be the 50% fib of this swing high move. This 80 level looks quite significant on the monthly chart so, although not the 61.8% fib, it’s the 80 level I’m watching for any support here as February draws to a close. Any break and hold below this 80 level will have me watching the 75 region which is also previous S/R and near the 61.8% fib:
S&P500 monthly: don’t get me wrong here. I’m not predicting which way the markets, any markets, are headed from here. I’m simply saying that major S/R levels have not been tested and / or given way just yet. The S&P500 is currently holding above a monthly support trend line and I’ll be the first calling for a move to 1,600 IF and WHEN this trend line is broken. It’s just that, like with the Yen pairs, we’re on a pull back here at the moment and no one knows how deep this might go:
One thing I also wonder though is that if the USD/JPY gets down to test the 50% fib near 100 then, would this correspond to the S&P500 breaking this monthly support trend OR testing the 1,600 level? Food for thought there!
Summary: the Yen pairs are currently pulling back after a length rally. Whilst some are concerned about the market-health message this may be sending I’m humbly wondering if this is simply a technical pull back as part of a general trend move? Any break and hold below the 61.8% fib on each pair may help to decide whether the current move remains intact or is undermined.
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