AUD/JPY Forecast: RSI continues to diverge in AUD positive manner
|The AUD/JPY pair closed below 84.00 - the lowest daily close since Jun. 23, 2017, strengthening the bear grip, however, the relative strength index (RSI) and the risk reversals indicate potential for a corrective rally.
As of writing, the cross is trading at 83.65 - down 6.08 percent from the Jan. 23 high of 89.07.
Daily chart
- The pair created a "long-tailed" doji candle on Feb. 14, signaling bearish exhaustion. But, the follow-through has been weak as the cross created a bearish outside day candle on Wednesday and fell back below 84.00 yesterday, indicating revival of the bearish move.
- Further, the 5-day moving average (MA) and 10-day MA are trending lower, indicating bearish set up.
So far, the technical picture looks bearish. However, the RSI continues to diverge in the AUD-positive manner. The pair found support yesterday around the weekly 100-MA on 83.58. Also, worth noting - the drop below the weekly 100-MA seen last week as short-lived. So, it could be said that the pair is trading near a strong support at the time when the RSI is showing positive divergence.
AUJP1MRR (one-month 25 delta risk reversals)
Meanwhile, as seen on the chart above, the one-month 25 delta risk reversals are being paid at 2.1 AUD puts vs. 3.4 AUD puts. It shows the volatility premium of AUD/JPY puts (bearish bets) has dropped sharply since Feb. 12, indicating a weakening of the bearish bias.
View
- The probability of a corrective rally is high.
- That said, only a daily close above the 10-day MA (now seen at 84.37) would confirm a short-term bullish trend reversal and open doors for a sustained move above 84.86 (Feb. 21 high) and towards 85.52 (38.2 percent Fibonaci retracement of Jan. 23 high - Feb. 14 low).
- On the other hand, a daily close below 83.32 (Feb. 14 low) would allow for a deeper sell-off to 81.49 (April 2017 low).
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