Imminent Flag Pattern Breakout in USD/JPY

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Imminent Flag Pattern Breakout in USD/JPY

Flag Pattern: USD/JPY has been consolidating since the end of last week. It is fading the rally that followed a key FOMC meeting which provided projections for rate hikes in 2015. After retreating from 109.45, USD/JPY’s price action has been choppy, but it looks like a flag pattern was formed in the 1H chart.

USD/JPY 1H Chart 9/24
usdjpy 1h chart 9/24

(click to enlarge)

Simple Moving Averages (SMAs): Price has broken below the 100-, and 50-hour SMAs but held above the 200-hour SMA, this shows some loss of bullish bias, but as we start the 9/24 US session, price is threatening to break above the 100-, and 50-hour SMAs as well as the flag pattern resistance. A break above 109 would be clearly break these resistance factors and should open up the 109.45 high.

Relative Strength Index (RSI): The RSI fell below 30 to show bearish momentum. Then it held below 60 and reflected maintenance of bearish momentum. If the RSI can pop up above 60 with price breaking above 109, there is a good chance of a bullish continuation.

Staying in Consolidation: If the bullish continuation scenario discussed above does not materialize, and price falls back below the overnight low of 108.50, we can see another bearish swing toward 108.00-108.12 where the 200-hour SMA resides. If price falls below 108, we might have more then just a short-term flag pattern developing, and the 109.45 high might be here to stay for the medium-term.

USD/JPY 4H Chart 9/24
usdjpy 4h chart 9/24
(click to enlarge)

Looking at the 4H chart, we can see a bullish trend that is intact based on price action, moving averages, and the RSI reading. As noted before, a break above 109 would likely open up the 109.45 high. A break above that exposes the 110 handle.

If price falls below 108, the 107-107.14 level, the middle of a previous consolidation and the 100-period SMA, could provide support. We should also monitor the 4H RSI as it approaches 40 and anticipate a bullish attempt if the RSI holds above 40.

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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.