Volume signals the reversal in the USD/JPY

The USD/JPY is another currency pair which has been trading in a tight range for an extended period and here we have moved to the spot market, but one where the same analytical principles apply. But in this case, we have the Japanese yen as the counter currency, in a pair driven more by sentiment rather than politics. And over the last few days we have seen an excellent example of volume price analysis in action and sending a strong signal of what to expect next, not simply for the pair, but for risk markets in general.

And the key price action is towards the end of November as the pair attempted to move away from the volume point of control which is anchored at 108.50 and denoted with the yellow dashed line. This is the fulcrum of the market and is where we have the heaviest concentration of volume as can be seen from the volume histogram to the right of the chart.

On the 20th and the 21st of November, we see high volume and clear buying following the move lower earlier in the month and a return to the volume point of control. Usd/jpy then starts to rally over three days, but consider the volume and two things are evident. First we have rising market on falling volume which is not a good sign. For a rally to develop strongly we should see widening spreads and rising volume. We have one but not the other. Second, note the volume on the last of these, the wide spread up candle. If we then compare this volume with price candle of similar size, it looks low for such a move in price.

This concept is one of the basic principles of volume price analysis – the comparison of volume and price one with another which we can use as a benchmark to gain insight into the level of participation by the market makers. And what is clear in this example is the volume here is well below what we should expect to see. The conclusion is therefore clear. The rally is weak and unlikely to develop further given this volume profile.

Therefore, it was no surprise to see strong buying of the Japanese yen today as risk on appetite evaporated and US markets sold off sharply on trade tariff news.  The yen is a currency that is bought when markets are looking for safe havens and sold when money is flowing into risk assets.

The question now is how far this pair will fall and given we have a strong platform of support in the 108.70 area denoted with the red dashed line of the accumulation and distribution indicator, along with the VPOC below, it seems we are set for further congestion for the pair around the 108.50 price point, until we see a strong move away, supported with rising volume.

By Anna Coulling

Charts from NinjaTrader and indicators from Quantum Trading