Bearish Divergence and Downward Channel - Q3 2021
To close Q2 2021 USDJPY topped out at resistance in the June 28 2021 weekly bar while aligning with the top of the ascending trend line begun in Q1 2021. In the following week to start Q3 2021 price fell to close below the ascending channel formed since mid April 2021. In so doing bearish divergence was formed with RSI. The downward move continued with price bouncing between lows and highs twice while forming a descending channel. This descending channel so far been the story for USDJPY in Q3 2021.
A sustained break below the horizontal support area of 109.70 while closing below prior weekly bodies or lows would confirm downward price movement within the downward channel. Price lows have touched and bounced off of 21 EMA 4 times already in Q3 2021 and as such the EMA has been forming an area of support. Should price close below this EMA it will further signal sustained weakness increasing the likelihood of a continuation of the current descending channel. To further validate the bearish story weekly price would also likely need to close below the 109.50 area which represents the midpoint of price from Q2 2021. To date, weekly price has failed to close below this important level which bolsters the case for a possible bullish break above the Q3 descending channel.
Should the downward direction continue, price is heading toward the horizontal temporary support level of 108.75 and possibly 108 levels. In such a move there may likely occur an upward bounce off of the 108.75 level. This level also aligns to provide possible support formed by the top of a descending trend line drawn from the March 29 2021 weekly bar top. A support bounce here may rally to the 21 EMA before heading back down to the bottom of the Q3 descending channel around 108.
Confluence between areas of support and resistance and Fibonacci extensions further bolster the significance of price targets referenced here. Fibonacci extensions are drawn here based on the Q2 2021 to Q3 2021 High to Low movement (Fibonacci Extension 1) as well as the subsequent top of the Q3 descending channel to mid August bottom of channel movement. The 1.272 and 1.618 Fibonacci extensions respectively of these two movements represent potential price targets in a continuation of the downward move. Noteworthy is that since formation of the downward channel price has yet to close above the 50% retracements of both Fibonacci Extensions 1 and 2. Additionally, price last week decisively bounced off of the top of the descending channel in confluence with touching the 23.6% retracement of Fibonacci Extension 2. This all occurred in concert with a negative jobs NFP report where only 235,000 new jobs were reported vs the 725,000 consensus forecasted which sent the dollar tumbling on Friday, September 3rd.
Conversely, a break to close above the descending channel and continued closes above the 109.50 area midpoint of Q2 would mark a very strong bullish signal with continuation of the strong bullish movement experienced in Q1 2021. In a bullish break above the descending channel price would likely take out the Q2 2021 highs and continue strongly upward.
In closing, the last instance of a noticeable USDJPY divergence between weekly price and RSI occur in Q4 2020. This was confirmed in Q1 2021 with a strong close above the 21 EMA after which price skyrocketed toward the close of Q1 2021. As such, the bullish divergence signaled in Q4 2020 accurately project price action in Q1 2021. Will the bearish divergence seen in Q2 2021 signal a USJPY fall in Q3 or Q4 2021? Or will price bounce off of the Q2 midpoint and break above the current Q3 2021 descending channel continuing upward thru the end of 2021?
A sustained break below the horizontal support area of 109.70 while closing below prior weekly bodies or lows would confirm downward price movement within the downward channel. Price lows have touched and bounced off of 21 EMA 4 times already in Q3 2021 and as such the EMA has been forming an area of support. Should price close below this EMA it will further signal sustained weakness increasing the likelihood of a continuation of the current descending channel. To further validate the bearish story weekly price would also likely need to close below the 109.50 area which represents the midpoint of price from Q2 2021. To date, weekly price has failed to close below this important level which bolsters the case for a possible bullish break above the Q3 descending channel.
Should the downward direction continue, price is heading toward the horizontal temporary support level of 108.75 and possibly 108 levels. In such a move there may likely occur an upward bounce off of the 108.75 level. This level also aligns to provide possible support formed by the top of a descending trend line drawn from the March 29 2021 weekly bar top. A support bounce here may rally to the 21 EMA before heading back down to the bottom of the Q3 descending channel around 108.
Confluence between areas of support and resistance and Fibonacci extensions further bolster the significance of price targets referenced here. Fibonacci extensions are drawn here based on the Q2 2021 to Q3 2021 High to Low movement (Fibonacci Extension 1) as well as the subsequent top of the Q3 descending channel to mid August bottom of channel movement. The 1.272 and 1.618 Fibonacci extensions respectively of these two movements represent potential price targets in a continuation of the downward move. Noteworthy is that since formation of the downward channel price has yet to close above the 50% retracements of both Fibonacci Extensions 1 and 2. Additionally, price last week decisively bounced off of the top of the descending channel in confluence with touching the 23.6% retracement of Fibonacci Extension 2. This all occurred in concert with a negative jobs NFP report where only 235,000 new jobs were reported vs the 725,000 consensus forecasted which sent the dollar tumbling on Friday, September 3rd.
Conversely, a break to close above the descending channel and continued closes above the 109.50 area midpoint of Q2 would mark a very strong bullish signal with continuation of the strong bullish movement experienced in Q1 2021. In a bullish break above the descending channel price would likely take out the Q2 2021 highs and continue strongly upward.
In closing, the last instance of a noticeable USDJPY divergence between weekly price and RSI occur in Q4 2020. This was confirmed in Q1 2021 with a strong close above the 21 EMA after which price skyrocketed toward the close of Q1 2021. As such, the bullish divergence signaled in Q4 2020 accurately project price action in Q1 2021. Will the bearish divergence seen in Q2 2021 signal a USJPY fall in Q3 or Q4 2021? Or will price bounce off of the Q2 midpoint and break above the current Q3 2021 descending channel continuing upward thru the end of 2021?