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Talking Points:
- EUR/JPY Technical Strategy: Flat, previous short setup still active, 2 additional short-side targets met
- EUR/JPY has finally broken below the confluent zone of support, and near-term resistance off of this area opens the door for additional short-positions.
- Last week’s range from 131.44-133.17 can set the groundwork moving forward, offering breakout potential as well as risk management levels for trend/mean-reversion strategies.
In our previous article, we looked at the swath of support that’s developed in the ~132 region after EUR/JPY had broken the bottom-side of a longer-running symmetrical wedge pattern. And as of this writing, we’ve seen no fewer than 12 of the past 14 days’ worth of price action trade somewhere in the 75-pip range from 131.50 to 132.25. There are a lot of wicks here, and this is price action that some traders can best describe as a ‘stick sandwich,’ or ‘barb wire,’ for all of the candlestick wicks that are jutting out and exposed from price action.
As we’ve discussed, there are numerous reasons for support/resistance in this zone; as there are three confluent Fibonacci levels within a 30-pip range, and a major psychological level just above recent price action at 132.50. At 132.03 we have the 50% Fib retracement of the secondary move in the pair taking the 2009 high to the 2012 low (shown on the below chart in Orange), at 131.79 we have the 61.8% retracement of the most recent major move, taking the April 2015 low to the May high), and at 131.67 we have the 76.4% retracement of the quaternary move in the pair (taking the 2014 high to the 2015 low).
With so many reasons for buyers to jump into a market, it makes sense to see support develop within such a strong, confluent zone, especially given a lack of fundamental news or information to push prices further lower in the trend. But this weekend brought a considerable amount of news, and the open of trading for this week saw EUR/JPY gap down on the back risk-aversion. But a tenuous session saw the pair trade right back into this previous zone of support, and this could be opening the door for additional entries in the direction of the bigger overall down-trend.
As of this writing, EUR/JPY is working on a spinning top on the Daily Chart. Think of the spinning top as a ‘poor man’s Doji.’ It still indicates indecision, it just doesn’t do it as well given the fact that the candlestick body saw some range on that day whereas the Doji sees open and close prices nearly the same. But – this still does highlight indecision, and after a key break of a big support zone, this could prelude trend-side entries in the direction of the break.
Traders that want to treat the move aggressively can look to lodge stops above today’s high of 132.20, and while you’re at it – you might as well get those stops above the nearest minor psychological level at 132.25. Let’s call the aggressive stop on the entry 132.30, which would be ~70 pips of risk with current market prices. For this, 130.50 could be a very adequate initial target, as this would be a roughly 1-to1.5 risk-to-reward ratio. A secondary target at 130-even could get the setup above the 1-to-2 marker.
Traders that want to use a more conservative or longer-term approach could look to base stops above this recent swath of price action. At 133.56, we have the 50% retracement of the most recent major move, and this level would get risk management levels on the outside of that ‘stick sandwich’ of price action. However, this would be approximately ~190 pips of risk, and would need extended targets to justify such an outlay. At 129.61 we have the 76.4% retracement of that most recent major move, and this would be nearing a 1-to-1 risk-reward setup. Just below that, we have the 50% retracement of the ‘big picture’ move, taking the 2001 low to the 2008 high, at 129.45 and this could provide a more attractive initial target on big-picture short positions. A little lower at 128.50 we have the 38.2% retracement of tertiary move, taking the 2012 low to the 2014 high, and below that we have the 2015 low at 126.08.
The long-side of the pair could be challenging here given the recent break of battle-tested support; and traders that do want to get long Euro can likely find more amenable avenues against currencies that are not the Japanese Yen.
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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