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EUR/JPY Approaches Major Reaction Point

EUR/JPY Approaches Major Reaction Point

Kaye Lee, Head Forex Trading Instructor

Talking Points:

  • Pullback in Overall EUR/JPY Uptrend
  • Tight Consolidation on Daily Chart
  • Key Resistance Zone for Initiating New Shorts

EURJPY is at one of those confluences of decision points where a sizable move could materialize. The only challenge is that the price action could go in completely opposite directions, and it is unclear which direction will prevail.

On the weekly chart below, price is pulling back to a rising level of support in a major uptrend, which would normally be a sign to go long. However, there are about 1300 pips to the downside, and at least 500 to the upside. Needless to say, as long as the trend line proves reactive, there is compelling reason to take a trade here.

Guest Commentary: Pullback in an Overall EUR/JPY Uptrend

EURJPY_Approaches_Major_Reaction_Point_body_GuestCommentary_KayeLee_January28A_1.png, EUR/JPY Approaches Major Reaction Point

If this were occurring on the daily chart, then it would be a clear buying opportunity. However, given that few traders are willing to wait weeks for a trade to develop, it becomes more complicated, especially since the below daily chart presents a rather different scenario.

As shown, a clear retracement trend is in force, as denoted by the declining parallel channel. Closer examination will prove that price has not really reached the rising support from the weekly chart just yet, and thus, the most prudent play would be to try to hop on short in anticipation of a proper test of that support. If it holds, there will still be 250 pips to be captured, and if it breaks, the 1300 pips could then be properly on the table.

Guest Commentary: Tight Consolidation on EUR/JPY Daily Chart

EURJPY_Approaches_Major_Reaction_Point_body_GuestCommentary_KayeLee_January28A_2.png, EUR/JPY Approaches Major Reaction Point

Given this very attractive proposition, it is worth looking for signs of a rejection of the previous consolidation area, as marked on the daily chart.

Meanwhile, the four-hour chart below provides a resistance zone that is 81 pips deep and based off the previous consolidation area. The exact levels are 141.05-141.86, and a sound rejection of this zone would provide the momentum to the downside.

Guest Commentary: Key Resistance Zone for EUR/JPY

EURJPY_Approaches_Major_Reaction_Point_body_GuestCommentary_KayeLee_January28A_3.png, EUR/JPY Approaches Major Reaction Point

This trade is best taken on the hourly chart (not shown). Price action on the hourly time frame has proven somewhat indecisive, so it may take two or three tries to get in on a proper short move, but the risk is obviously much smaller on this frame. Pin bars, bearish engulfing patterns, and bearish reversal divergence are all viable entry triggers, but given the indecision, traders might be better off having two positions in order to scale out quickly should price hesitate to move in our favor.

By Kaye Lee, private fund trader and head trader consultant,

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