Convergence of Support and Resistance May Setup an AUD/JPY Breakout

Talking Points:

• Support and resistance converging in AUD/JPY trading
• Daily volatility has reached a 3-year low
• Bearish and bullish setups possible

The convergence of support and resistance may push AUD/JPY out of a multi-year low in volatility.

After setting the 2014 low in February, AUD/JPY rallied over 800 pips in less than 2-months in an upward channel. The bottom trend line in that upward channel may continue to provide support above 95.00. But since setting the 10-month high at 96.51 in April, AUD/JPY has struggled to rise above the resistance from the October 2013 high at 95.68. Beyond the convergence of support and resistance, AUD/JPY’s Average True Range for 4-weeks of trading has fallen to a 3-year low.

The low in daily volatility means that not only are we looking for a breakout above resistance or below the support trend line, but we also have to look for a gain in volatility.

For those looking for an opportunity to buy AUD/JPY, only a close above 95.68 and/or a break above the current 11-month high at 96.51 from April could confirm a move higher. The pair found both resistance and support by the 97.50 level in the first half of 2013, and this level may again provide resistance and therefore serve as a target for bullish AUD/JPY traders.

Conversely, those looking for an opportunity to sell AUD/JPY should wait for a close below the rising trend line, which currently sits around 95.00. But because of the recent lull in volatility, traders should wait for a significant move lower, as a sideways move through the upward trend line should not be considered a strong sell signal. If AUD/JPY does close below the trend line, then support may first come in by the former resistance at 94.50, and then next support may be provided by a longer upward trend line from May of 2012.

Finally, a look at AUD/JPY on a 4-hour scale also supports a case for a significant move in either direction. AUD/JPY has traded in a shallow downward channel since the April high, and the pair just touched the top of the channel for the third time. A close above the channel top could signal further gains in AUD/JPY, while a reversal candle on the 4-hour chart could signal a decline towards the channel bottom, which is slightly below the previously mentioned 94.50 support.

Charts created by Baruch Spier using Marketscope 2.0. Add DailyFX Support/Resistance to your charts at FXCM Apps.

-- Written by Baruch Spier, DailyFX Research. Feedback can be sent to [email protected] .