The USD/JPY has dropped 200 pips in the last nine trading days. Could this be the start of a major decline on its way back to November 2016 lows or is that too optimistic of a belief for even the hungriest bears heading into winter? The opportunities that exist in the near term are abundant and we can’t let those slide away. Since January of this year, we have formed a channel and held the top boundary nearly all year long, most recently 9 days ago at the start of the above-mentioned decline. Throughout the year the bottom side of the channel has gotten pushed lower with each retest although overall it’s still in a sideways market. Could the last week be a signal for the next test?
Taking things down a level from the Daily to the 3h chart, the fall is even clearer and this is where the opportunities lie. To most, the obvious choice seems to be to ride the trend down towards the 111.70 area, the origin of the last move, marked by the dark green circle. This can be accomplished a few different ways. Since these are still larger time frames, the weekly binaries offer an attractive option due to the time still available in those strikes.
Currently, with price slightly below 113, the weekly binary 112.75 strike could be considered to short for about $42.50 max loss and the 112.25 strike for only $22 risk. With two trading days and a Daily ATR of 60 pips, those options are well within reach riding this trend till the weekend.
Another alternative could be using daily binary strikes where if you shorted the 112.80 strike at around $40 risk and the 112.60 strike at around $27.25, would be similar risk to reward scenarios but the move needs to happen sooner.
A third way to consider the short side that may exist in the 110.40-112.90 spread with price being just above the ceiling strike price that you could enter with about $19 risk. As I always say, look at the risk potential of each trade and find the one that matches your risk tolerance best.
Not everyone believes in jumping on the trend and there are great areas to get long in this exact same setup. Many traders prefer to wait for price to come to them and if we followed the start of the upward price action on October 15th you will see an area where price stalled before being launched higher (marked in green). Price eventually came back down to that area and found almost immediate buying pressure that drove price higher again, that lead to ascending wicks on the candles (marked in yellow).
This area could act as a price target for those setting working orders from the short side or a long entry for those that prefer to wait. This would give traders a few different entries using daily strikes. If you used the center of the flat area as your entry point, the 112.25 would be our potential turning point. You could potentially consider to get long the 112.20 binary strike which would be slightly ITM for around $55 risk, the 112.40 strike is only 15 pips from the 112.25 turning area would be priced around $44 risk and the 112.60 strike is only 35 pips would be approximately $30 risk, all well within an hour or two hour move in the USDJPY (1 Hour ATR is 18 pips). Correct position sizing is the name of the game in situations like this.
With two days to go in the week you have to decide, whether it’s time to ride the trend till the weekend or follow what history has shown us. Either way you play it, it appears its setting up the markets for next week to either bounce or slide, which always makes Sunday evening something to look forward to.