USD/JPY: A recovery could kick in soon

USD/JPY Daily Chart (Chart source: Investing)

USD/JPY has been in a downward trajectory over the past couple of months, as the pair has been pressurized by broader dollar weakness against the G7 basket. That said, I believe the pair has now approached an important support zone. The pair seems to have formed a bullish Bat harmonic pattern, which as the name suggests is a bullish reversal pattern. By definition, the AB leg is approximately 0.382-0.50 of the XA leg, the BC is approximately 0.382-0.886 of the AB leg, the CD leg is approximately 1.618-2.618 of the BC leg, and the AD leg is approximately 0.886 of the XA leg. Point D is the infliction point as it is around this point, where price is expected to find a bottom and potentially reverse to the upside.

After hitting the low point on Friday, USD/JPY has rebounded albeit by a very small margin. The entire AD leg has retraced nearly 0.88 of the XA leg, suggesting that a reversal in trend could be on the cards. Meanwhile, the higher low in USD/JPY between Point X and Point D has been accompanied by a lower low in the daily RSI, suggesting that the pair has got oversold at a higher price level. This pattern is referred to as positive reversal and is a bullish pattern.

If the pair shows signs of bottoming near 108 levels, a reversal in trend looks likely. As long as the low at Point X (107.33) holds on a daily closing basis, USD/JPY can be expected to go higher, potentially towards 112.26 (0.618 retracement of fall from 114.74 to the recent low of 108.28) followed by 114.96 (price objective of the positive reversal pattern). In fact, if the pair does not break below the low of Point X, a potential inverse Head & Shoulder pattern could unfold in the days ahead, whose neckline is at 114.40. Having said that, a daily closing below Point X (107.33) would invalidate my bullish stance on the pair.