Rallying to an Exhaustion

Risk appetite returned with a vengeance as benchmark US indices rallied to close above key levels yesterday. Stocks in Europe continued this fierce rally as they gained upwards of 1% over the London session, sending yen crosses screaming higher. Glad I stayed put yesterday on the allure to try selling EURJPY resistance into the 110.85 level as that play would have been hammered. On a fundamental basis, not much has changed from when market sentiment dominated headlines last week. The markets just seem to be on a perpetual see-saw ride between risk aversion and appetite. That being said, patience and discipline yesterday has allowed us to look to try and take advantage of this risk see-saw which leads me to the AUDJPY.

Although equities are trading up today, albeit barely, gold which has been wearing the risk asset hat as of late is sliding lower, down -$6. On a fundamental basis, the situation in Europe is unchanged as is the declining GDP of China and the US’ labor situation. It seems this squeeze higher could be a potential opportunity to jump back in short risk.

That finally brings us to the AUDJPY. Lower gold along with stocks teetering between positive and negative territory brings me to believe that this move higher in yen crosses may be overextended. There are some key technical levels in play here that push AUDJPY to the forefront amongst other yen crosses. On the daily and 4 hour charts, the 78.00 level sees daily trend-line resistance converging with 2 alternate levels: broken bear flag support which should now serve as resistance along with .618 retracement of the 80.85 to 72.85 leg lower.

The hourly chart provides a few more indications of potential exhaustion on this surge higher. AUDJPY made new highs as the MACD and RSI did not confirm giving signals of bearish price/momentum divergences. Short opportunities should arrive on a rebound back into the 77.75 to 78.00 zone. Staggering entries, half a position at 77.70 and the other half at 78.00 with stops above prior highs into 78.58, would provide an average rate of 77.85. Downside targets on this setup would be slightly above the 38.2% retracement level at 76.00 for half the position and a retest of the key 75.10 level for the rest. Risk/reward is 2.5:1 at a minimum on the first target. Unfortunately, as I was putting the SOTD together, AUDJPY has already dipped down to the 77.00 level. Due to the fast moving nature of FX markets, on the next post, I will be taking the liberty to write up a quick setup first and have charts follow. As usual, I will be updating this post with developments