USDJPY has confirmed a on the 4-hour timeframe.
The potential reversal zone (PRZ) is comprised of two ratios:
0.886 OB retracement, 108.502,
2.0 AB projection, 108.696.
Stop loss is set at 1.13 0B projection, or 108.975.
Take profit is set at two levels, management and final.
The management level is the 0.5 BC retracement, or 107.639.
The final level is the 0.886 BC retracement, or 106.976.
The overall risk to reward ratio for this trade is 3.17.
Price has already shown that the 0.886 ratio is a significant level of resistance, with price having previously already actually reversed into the first take profit, but returned back towards the PRZ now. This gives us another opportunity to enter a short position.
Other indicators that are calling for a sell is the on the 4-hour, which has reached overbought territory above 70.
Also, in the past 4 hours has been particularly strong (I will explain this later), which could indicate exhaustion of buyers of the pair.
A few hours ago, however, non-farm payrolls for June was released. There was an unexpected jump to 224,000, which was higher than the expected value of 160,000. The significance of this is that it adds a bit more doubt towards the interest rate decision upcoming in late July during the FOMC meeting. Currently, I am still highly confident that the Fed will decide to lower the rates which would benefit our short position, but the 50-basis point cut that some traders are discussing is off the table for me now, and I think we are looking instead at a cut in the 25-basis point region.
Today's non-farm payrolls report is also the reason why the was so strong. However, while the initial reaction to the report pushed the USD stronger, I still think that the strength of 0.886 , as well as the continued expectation for a rate cut this month (albeit 25-basis points and not 50-basis point), will keep today's rally in check and instead potentially allow us to see more downside later on.
Given that this is a pattern, there is the potential for two different PRZ's, and so we could also be looking at a different opportunity should price push past the and towards the 1.13. In this case, I would look at this as a different trading opportunity altogether, although currently, the strength of the 0.886 seems quite dependable to me. This is also why it's important for us now to make sure that we don't see a prospect of a breakout past the 0.886 and towards the 1.13 before we enter our short position.
Thanks for reading,