As I wrote about earlier, the USDJPY had formed a descending triangle, which completed the projected downward move on Christmas Eve. The currency continued to move down forming a low at 106.41. Since January 3, 2018, only bullish bars have formed as shown on the daily chart. Does this indicate that the trend has turned to the upside? No. More likely it was simply a retracement (also known as a pullback). For those unfamiliar with retracements, it is a period where the market may move in the opposite direction (likely from traders taking profits) but the trend is still intact.
However, notice that the current bar (last bar on the chart), is forming a potential candlestick reversal bar. This could indicate that the retracement is completed and the downtrend will resume. Going down in time to the four hour chart, the Stochastics is indicating the market is potentially oversold because it is above 80. Additionally, by adding the Fibonacci retracement lines, show that a retracement to the 61.8 magenta line has occurred and price is also potentially forming a candlestick reversal pattern. The 61.8 Fibonacci is also considered to be the "golden ratio" and quite often is where the market resumes the original trend.
With the daily chart indicating a potential candlestick reversal and by going down in time, the charts reveals:
- Potential overbought status on the Stochastics
- Potential reversal bar at a key Fibonacci level
If the candlestick reversal patterns are confirmed then the USDJPY may resume the downtrend and a new low may form (exceeding the prior low at 106.41). Additionally, if the candlestick reversal pattern on the daily is confirmed, then hidden divergence will most likely appear causing a momentum move to the downside (lower highs in price with higher lows in the Stochastics). Traders will also need to watch out for the blue ATR at 108.25 as this could serve as a support level.