We have shown several times how well the RSI indicator is suitable as additional help when analyzing courses. The RSI indicator represents the strength or weakness of the prevailing trend. It is the relative strength of a trend in relation to a certain period of time. In this way, reversals in particular can be made visible in long-term trends.
The upper weekly chart shows an RSI divergence that has developed in recent months and in May due to the higher high in the price and the lower high became visible in the RSI indicator. A breakout from the rising triangle was followed by a strong sell-off of the US dollar against the yen.
Divergences are one of the most reliable set-ups for identifying weakness in a trend. This is because a leading forecast is possible in this way, while the indicator only follows the course if the trend is confirmed.
In this case, too, the RSI indicator clearly indicated that the trend is weak was, although the trend itself continued to increase. The trade would have worked very well. The trader would have to do nothing more than wait for the outbreak. The falling RSI indicator would have warned him in advance and would have given him enough time to plan the trade. Two rules would suffice for him, according to the motto "Keep it simple and smart".
The entry occurs when...
- the RSI indicator has developed a divergence.
- a relevant resistance or support was broken.
That's it. All this when considering a weekly chart.
USD / JPY on a daily basis
If you look at the daily chart, you will notice that not only the upward trend was broken, but also the 200s moving Average. However, it is also noticeable that the RSI divergence is no longer visible on a daily basis. Instead, the onset of weakness is confirmed by the RSI indicator. At this point it becomes clear that sometimes it makes sense to analyze several time levels.
The outbreak occurred at the same time as the devaluation of the yuan by the PBOC and the falling stock markets. Since the Japanese yen is a "carry trade currency" (credit is taken out in yen and invested in shares), the yen appreciated against the US dollar. This is because the dissolution of these loans drives the demand for yen.
So we have not only a market-related reason for the falling currency pair, but also a fundamental one. The question remains whether the Japanese central bank will continue to take measures against the rising yen, as it has done before, or not. And above all, what is interesting for market technicians: How do you react to this from a technical analysis perspective?
Possible scenarios for the currency pair USD / JPY
As you can also see in the daily chart, the US dollar was bought strongly against the yen from a level. That also coincided with the reversal in the stock markets. However, it should also show up in the RSI indicator if it should go up at least in the short term.
The first scenario provides for a retest of the blue trend line, which has shown the upward trend in recent months. From a fundamental point of view, the scenario would be likely if the Japanese central bank intervened or the stocks continued to rise. From a technical perspective, traders should pay attention to the outbreak of the trend in the RSI indicator.
If the trend line of the RSI indicator is not overcome, scenarios 2 and 3 would come into question. In this case, the RSI trend confirms the falling trend in price. The horizontal line represents relevant support in scenario 2. If the currency pair is traded below, the probability of the trend continuing is increased.
In scenario 3, the RSI indicator should not cross the trend line, however horizontal support is not broken down sustainably. In this case, a sideways phase could follow.
Usd/JPY Trading Idea Nadex 1-2pm Monday
Conclusion - technical divergences and confirmations
Whether there are serious fundamental reasons or the trend is simply weakening due to a lack of demand is clear the market technology is actually irrelevant. It reflects the current state of the market, including all the new information it contains.
Therefore, the fundamental reasons are also visible in it. Divergences from the RSI indicator can provide clear forecasts, especially on a weekly basis, as we saw in the example above. The analysis of other time units of the chart is useful if you want to take a closer look at the current status quo and work out possible medium-term scenarios.
With the broker 24Option, such or similar analyzes can be used in trading binary options.