Bearish Outside Day Signals Reversal Risk for the USD/JPY

What to Know

• Bearish outside day signals momentum loss near 23-month high
• Rising channel breakdown suggests weakening bullish structure
• 20-day moving average now critical short-term support level
• Key downside triggers activate below 159.37 swing low
• Uptrend remains vulnerable unless 160.60 is reclaimed quickly

Momentum Stalls at Channel Peak

Bullish momentum in the USD/JPY pair has started to show signs of slowing, with the potential for a sustained bearish reversal increasing after Thursday’s sharp decline. The pair successfully reclaimed support near the 50-day moving average in late-May, leading to an advance that formed a narrow rising trend channel. A high of 160.60 was reached on Thursday before sellers took back control, leading to a sharp one-day decline to a six-day low of 159.53. It resulted in a successful test of support at the 20-day moving average and a large bearish outside day. 

Bearish Outside Day Signals Pressure

During the decline the lower channel line was broken briefly, a sign of weakening, before support was recovered following a bounce off the 20-day average. The large bearish outside day on Thursday, covering the range of the prior five days, combined with a relatively weak close near the low of the day and a break below the lower channel trendline, suggests that sellers may reassert themselves before the USD/JPY reaches a new high. 

Resistance Near Long-Term Highs

While the USD/JPY has shown strength during its climb, coming relatively close to the 23-month high of 160.72 reached in April, a sharp decline followed that test of resistance, similar to what occurred after the high established in January. That’s a pattern that might appear again once a sustained high is established. In addition, relatively low volatility, as evidenced by the tight rising channel, is typically followed by higher volatility. 

Support Levels and Breakdown Triggers

A decisive break below the 20-day moving average and Tuesday’s low would be bearish and would be further confirmed by a drop below an interim swing low of 159.37, which is part of the channel structure. If a bearish signal confirms, then the area around the uptrend line becomes a potential lower target. The 61.8% Fibonacci retracement is at 157.15, proving another potential lower target for USD/JPY if sellers take back control. 

Key Support Zone in Focus

Nonetheless, the first key price zone that might show support is from the 50-day moving average at 158.94 down to the minor higher swing low of 158.75. That low completed a successful test of support at the 50-day moving average after it was reclaimed several days earlier. Together, that price zone presents the first potential support zone of significance. If it breaks the next support area looks to be around the lower swing high of 157.92 and the 50% retracement of the prior advance, at 157.81. 

Final Inflection Point

Given the developing bearish signs, a bullish continuation with a rally above Thursday’s high would be the most unexpected next development. But if it were to occur, it would be a strong bullish signal. Consequently, there have been suggestions that the Bank of Japan may be maintaining support for the yen, and that is helping sustain a strong resistance zone. Regardless, key support is at Thursday’s low of 159.53 and resistance at that day’s high of 160.60. Just as the failure near the top of the rising channel triggered the current bearish warning signs, a break beyond either of these levels should signal the next directional move. 

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