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EUR/JPY Technical Analysis: Reversal Plays May Prove Attractive

EUR/JPY Technical Analysis: Reversal Plays May Prove Attractive

James Stanley, Senior Strategist

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Talking Points:

  • EUR/JPY Technical Strategy: Flat, previous short setup still active; top-side reversal setup identified
  • EUR/JPY has continued to catch support in the 131.67-132.03 support zone, but declining highs on the top-side of price action has setup a descending wedge formation.
  • 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 continued short setups in EUR/JPY after the longer-running symmetrical wedge gave way after the European Central Bank’s announcement that they’d ‘re-examine’ their QE-outlay at their December meeting. This led to precipitous price action that saw numerous support levels give way. But as of our last writing, we’d run into an interesting level that offered no less than three-to-four reasons for continued support; and since then we’ve seen multiple tests off of this level. This can make reversal plays extremely attractive, as a battle-tested support level can be evidence of a ‘line-in-the-sand’ that buyers are defending. But the top-side of price action in EUR/JPY may not be encouraging enough to rule out continued short positions, at least not yet.

Near-term, we’re basically looking at a congestion setup with a bottom-side bias given the recent break of the symmetrical wedge formation (which is, in-and-of-itself a congestion formation). This can often happen after an out-sized move or when there is a big fundamental issue relevant to that market; and the argument can be made that we have both in relevance to the Euro and the Japanese Yen. As a matter of fact, because of these fundamental reasons, we looked at EUR/JPY as a more attractive way to play Euro weakness as opposed to the US Dollar in last week’s Market Talk piece entitled, Two Ways to Trade the Euro and the Dollar.

Traders can potentially look for trend-continuation moves with the expectation of near-term confluent support finally giving way. At 132.03 we have the 50% retracement of the secondary move in EUR/JPY (taking the 2008 high to the 2012 low), at 131.79 we have the 61.8% retracement of the most recent major move, taking the 2015 low to the June high), and at 131.67 we have the 76.4% retracement of the ‘tertiary move’ in the pair, taking the 2014 high to the 2015 low (shown in yellow on the below chart). Traders can use each of these levels as near-term profit targets, with additional targets set to 131.50 (minor psychological level and last week’s low), 131.00 and then 130 (both psychological levels).

Alternatively, top-side plays could prove attractive given the veracity of support in this confluent zone. This could be the basis for reversal strategies using this support level to base long positions. Traders can look to lodge stops below last week’s low, with targets set for 133.56 (50% retracement of the most recent major move), 134 (minor psychological level and recent price action swing-low), and then 135.13 (61.8% retracement of the tertiary move, and projection of prior up-ward sloping trend-line that made that recently broken symmetrical wedge).

The main premise behind reversal plays would be the continued build-up of support at this confluent zone on EUR/JPY. With this type of strategy, trade management is a necessity as reversals can move fast and profits can become losses in a blink of an eye. For that reason, a break-even stop could be utilized to adjust the stop to the original entry price should the trade initially move higher.

Created with Marketscope/Trading Station II; prepared by James Stanley

--- Written by James Stanley, Analyst for DailyFX.com

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Contact and follow James on Twitter: @JStanleyFX

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

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