AUDJPY Retracement Setup (Feb 26, 2015)

From there, the pair retreated and started to make a forex correction to the Fib levels marked on the 1-hour time frame.

The 38.2% Fibonacci retracement level lines up with the broken resistance level, making it a potential support zone. The pair has formed a reversal candlestick right on the area of interest, indicating a potential short-term bounce. At the same time, stochastic is indicating oversold conditions, which means that sellers are already exhausted.

A bounce from the current levels could lead to a move up to the previous highs around 94.00. Sustained buying pressure might even lead to the formation of new highs, possibly until the 95.00-96.00 major psychological levels.

On the other hand, a break below the 38.2% Fib might still lead to a test of the lower Fibs, right until the 93.00 major psychological support. This might be the line in the sand for any declines, as a break below this level marks the start of a prolonged drop.

The path of least resistance is to the upside, as China has just released a stronger than expected HSBC flash manufacturing PMI for February. The index landed back above 50 and indicated industry expansion, which might mean stronger demand for Australia’s raw material exports.

Meanwhile, data from Japan is expected to show more weakness, particularly in inflation and consumer spending. Core inflation could mark another monthly decline while household spending and retail sales are expected to print negative readings.

The event risk for this trade setup today though is the weaker than expected Australian private capital expenditure report released earlier today. It showed a worse than expected 2.2% decline for the previous quarter, reflecting weaker business conditions.

By Kate Curtis from Trader's Way