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EUR/JPY Technical Analysis: Setting Up In Front of ECB

EUR/JPY Technical Analysis: Setting Up In Front of ECB

James Stanley, Senior Strategist

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Talking Points:

  • EUR/JPY Technical Strategy: Flat, previous short setup still active, all short-side targets cleared.
  • EUR/JPY continued lower after breaking below confluent support; but new support at the psychological 130-zone may prove vexing for continuation setups.
  • While long positions look unattractive given the veracity of the move, short positions can be challenging considering the lack of nearby resistance.

In our last article, we remarked on the ‘stick sandwich’ that was showing in EUR/JPY after a huge, confluent support zone had come into the market. A stick sandwich is a loosely applied price action term that denotes a lot of candlestick wicks over a defined period of time. This illustrates jumpiness on both sides of the market, as moves lower are quickly retraced by new buyers and moves higher are quickly retraced by new sellers. This type of price action can often show up near the top or bottom of a move, and as EUR/JPY continued to slosh around on the lower-boundaries of that support, we highlighted a short entry setup in that previous article.

But with price action having run into a new, major level of support at the psychological barrier of 130.00, traders may want to exercise caution if looking for trend-continuation entries. The 130 level initially came into EUR/JPY on Wednesday, in which buyers quickly jumped in to pull prices back to a daily close of 130.33. But another test on Thursday and Friday were unable to break prices lower, so this is now three days of support at a very relevant threshold; and while this isn’t a direct reversal entry, it could certainly be enough to give traders reason to wait for a more attractive sell-side entry in the early portion of next week.

The price of 130.67 could be particularly interesting for this purpose, as this is near the daily low of the spinning top formation that we discussed in our last article, as well as being near-term resistance throughout this week. So, we have a current example of old support becoming new resistance, and this can be a primary ‘price action tell’ for trend-resumption entries.

Also of relevance for the top-side of price action we have the minor psychological level of 131.00, which is also the projection of the current down-ward sloping trend-line (shown on the below chart in red).

With an enormously important ECB meeting on the docket for this coming Thursday, fully expect EUR/JPY (and most other Euro-pairs) to be thrown around with whichever direction the ECB gives markets; as in, if they actually increase or extend QE, that downside in most Euro-pairs is going to be really attractive. But if the ECB surprises and doesn’t make any moves, look out above: The Euro will likely spike with significance as much of the world is expecting something from Mr. Draghi.

The pertinence of such a theme in EUR/JPY is the fact that traders may be able to use the first few days of next week to let EUR/JPY rip higher so that they can short the pair from a significantly more attractive price (maybe even a 131.50 hit is in store as traders tighten up risk ahead of the ECB). But the big motivator here will likely be Thursday, so position as such, and be careful of chasing any moves ahead of the data, as significant vulnerability in many of these markets can show with any unexpected surprises.

Are you looking to improve the execution of your analysis with a more proactive trading approach? Traits of Successful Traders may be able to help.

EUR/JPY Technical Analysis: Setting Up In Front of ECB

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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