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EUR/JPY Technical Analysis: A Major Downside Break Has Occured

EUR/JPY Technical Analysis: A Major Downside Break Has Occured

2016-01-05 20:43:00
James Stanley, Strategist
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Talking Points:

In our last article we looked at the continued down-trend in EUR/JPY as support levels were continuing to give way to diving prices. At the time, EUR/JPY had just angled below a confluent zone of support in the 132-region that offered three different key Fibonacci levels within a 40-pip range. After the short setup in the article previous to that promptly hit its initial profit target, we had targets remaining at 131, 130, 129.45 and then 126. Three of those four have now been met, and one remains at 126.00.

As you might imagine, long positions can be difficult to work with right now given the dramatic drop in prices that we’ve seen after the past three trading days have wiped out 400 pips off the EUR/JPY spot. But with that said, triggering short might not be any more comfortable right now as prices continue to languish near support. As is the case with trading breaks, there’s never a comfortable entry point.

The best stance in these cases is often one of patience. Institute a conditional setup and let the market come to you. If it doesn’t, so be it. If it does, worst case scenario you can at least you lose on your own terms. And at least you can avoid thatNumber One Mistake that Forex Traders Make, even when you’re losing.

To illustrate the veracity of this recent move, below is a clean EUR/JPY chart with only the recent trend-channel applied. You’ll notice that we just broke below the bottom-side of this channel. That’s extremely bearish. But it isn’t a sell signal, nor is it even really a setup. This is more of a warning sign. For the setup, you have to read a little bit lower.

EUR/JPY Technical Analysis: A Major Downside Break Has Occured

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

How to Get Short EUR/JPY

As mentioned earlier, you can approach these situations by ‘letting the market come to you.’ As ridiculous as this may sound to a new trader, you basically just need to plan an approach and stick to it if the conditions outlined in said approach line up.

As in, if we know that we want to sell EUR/JPY but really don’t want to do it while price action is dwindling near support, we can simply outline levels that we want to trigger at should price action move to those areas in the near-future. This can often be done on both sides of price action, above and below. But in the case of EUR/JPY, since we are so stretched and there aren’t any nearby relevant levels of support until we get down to 126, traders might want to focus this type of approach on inside price action; as in letting prices retrace before triggering short. This would provide the luxury of more proactive stop placement and a better overall risk-reward.

There are three zones in the 225 pips above current price action that could serve this purpose. And to institute this plan, traders want to actually see resistance come into the market. Prices hitting these zones are not enough alone; we also need evidence that sellers are coming in, and that’s what the extended top-side wick can tell us.

Those potential price zones of resistance on EUR/JPY are on the below chart. Specifically, the level of 128.50, the zone around 129.50 and the major psychological level of 130 could be prime for new short positions in the coming week.

EUR/JPY Technical Analysis: A Major Downside Break Has Occured

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

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