The Australian dollar to Japanese yen (AUD/JPY) chart is presenting a very clean and compelling bearish technical setup. Yesterday, the pair experienced a false breakout above a key horizontal resistance marked in red. However, this breakout was short-lived, as the price quickly dropped back below the resistance, signaling a failure of bullish momentum.
Today, the price is consolidating, moving sideways, and completing a head and shoulders pattern. Two days ago, we observed the formation of the left shoulder, followed by the head yesterday, and now the right shoulder is taking shape. This textbook bearish formation has its neckline marked with a horizontal support level in blue, which the price is currently testing.
How to Trade This Setup?
The sentiment on AUD/JPY is clearly negative. The false bullish breakout above the red resistance adds to the bearish outlook, as does the formation of the head and shoulders pattern. These technical factors suggest that a breakout below the blue neckline would be a decisive signal to sell. A daily close below the neckline would confirm the bearish sentiment and open the path for further declines.
Conversely, if the price unexpectedly moves back above the red resistance, it would invalidate the bearish setup and act as a signal to go long. However, given the current market dynamics, the chances of such a reversal are slim.