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EUR/JPY Technical Analysis: Trading Deeper Within the Wedge

EUR/JPY Technical Analysis: Trading Deeper Within the Wedge

James Stanley,

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Talking Points:

  • EUR/JPY Technical Strategy: Flat
  • EUR/JPY surges above resistance as risk aversion continues to increase.
  • Five consecutive daily gains behoove patience for the short setup until more clear resistance comes in.

In our last piece, we looked at the support that had developed in the 133.50 zone in EUR/JPY after three days of big losses last week sent prices spiraling lower. Since then, prices have continued to resist in the 135-135.30 zone, opening the door for potential short positions while price action remains confined within the longer-term, bigger-picture symmetrical wedge in EUR/JPY.

The bigger-picture wedge consists of a resistance trend-line connecting the June 2015 high to the August 2015 high, and a support trend-line connecting the April 2015 low to the September 2015 low; and indicates congested price action after the pair put in outsized moves last year. And as both represented economies face continued deflationary pressures and as analysts begin to increase estimates for additional stimulus to offset these pressures, the EUR/JPY becomes a strong proxy for ‘risk-on’ and ‘risk-off’ as many other currency pairs.

Until this symmetrical wedge breaks, traders can integrate a range-bound logic of selling resistance and buying support; and for those looking for extended moves, this could provide the initial entry should either trend-line give way. Currently, the short side is more attractive for this theme, as we’ve seen three consecutive days of resistance in the 135-135.30 zone, and prior support at 133.50 could open up the possibility of an attractive risk-reward ratio on a short entry. For this thesis, traders can look to place stops above 135.35 (the Friday high, as well as the 61.8% Fibonacci retracement of the most recent major move, taking the April low to the June high), with targets cast towards that 133.50 support level, which is the 50% Fib retracement of that same move, as well as being a price action swing low from last week.

The long side of EUR/JPY could be more difficult to work with given the current setup and the amount of overhead resistance very near current price action. To trade the long side, traders could wait for a break of this resistance so that the pair could show the prospect of continued bullishness, looking to buy new support in the vicinity of old resistance. The resistance levels that would be most attractive to this end would be in that 135 zone, in which breaks of this zone from 135-135.30 could open the door for long positions with targets cast towards 137.50 (confluent level of 76.4% of the most recent major move and a major psychological level).

Written by James Stanley of DailyFX; you can join his distribution list with this link, and you can converse with him over Twitter @JStanleyFX.

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