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GBP/JPY Shorts Favored as Bearish Elliott Wave Pattern Prints

GBP/JPY Shorts Favored as Bearish Elliott Wave Pattern Prints

Jeremy Wagner, CEWA-M, Head of Education


We think GBP/JPY is in the early stages of a meaningful sell off. Earlier this week, we identified a bearish Elliott Wave 5-3 wave pattern that began on September 17 and appears to have ended on October 23. The kick off for this potentially powerful wave started on the highest volume day for GBP/JPY in over 5 years (read GBP/JPY Highest Volume Day Kicks Off Elliott Wave 3).

Market Condition: Breakout

Bias: Short

Entry: 184.30 (break below circle wave ‘x’)

Stop Loss: Above a recent swing high upon breakout (near 186.00)

First Target: 181.00 (September 29, 2015 low)

Second Target: 178 (equal wave measurement to Sept 17-29 down leg)

Third Target: 174 (1.618 measurement of Sept 17-29 down leg)

Last night’s high after the Bank of Japan statement on monetary policy was important because prices held below the 186.30 key level. In essence, we now have a smaller degree bearish 5-3 pattern that fits within the context of a larger 5-3 bearish pattern.

(Want to copy the larger degree Elliott Wave labels to your chart? Click on the triangular share icon in the upper left hand corner of this chart and select “Make it Mine”)

At this point, it is about identifying the spot for a good risk to reward ratio trade.

One can use a break of horizontal or trend line support to trigger the entry or wait for small rallies to sell into. Above, I’ve highlighted using horizontal support as a means to trigger the entry on a breakout.

If a sell off ensues as anticipated, then a large obstacle in the way would be the grey support line connecting the September 29 and October 13 lows. Should that hurdle get cleared, it would open the door to our first target of 181.

Lower potential exists if we are indeed in the early stages of a 3rd wave lower.

From a sentiment perspective, retail positioning just flipped to net long as previously traders were net short. In fact, long positioning has increased 9% over the past week and longs have increased 10% over the past 24 hours. Couple that with short positioning shrinking 14% over the past week and shrinking 21% over the past 24 hours and we have a large shift towards bullish sentiment. That renewed bullish enthusiasm helps build the case for the market to continue its trend lower as sentiment is used as a contrarian signal.

(Sign into DailyFX Plus, or receive a complimentary trial to receive a historical perspective on GBPJPY sentiment positioning.)

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.