Talking Points:

- EUR/JPY has reversed by more than 300 pips off of the two-year high set just last Friday.

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EUR/JPY came into 2018 exhibiting the same strength that denominated much of the pair’s performance last year. The year of 2017 produced quite the run for EUR/JPY, as markets continued to attempt to get in-front of any potential tightening out of the ECB while expectations remained for the BoJ to remain loose and passive. But already, the New Year is proving to be a change of pace, as EUR/JPY reversed that bullish move and has now sold-off by more than 300 pips from the high that was set last Friday.

On the hourly chart below, we’re focusing-in on this recent reversal, and notable is how each fresh swing-high failed to test the prior swing-low of support. Also of note is how key areas of support, such as 135.00 or 134.41 have been unable to produce any element of respite in this down-trend; further illustrating just how bearish near-term momentum has become. Sellers haven’t even been willing to wait for resistance to show off of prior support, instead pushing the pair-lower before resistance might be able to come into play. This type of bearish anticipation from sellers can portend a continuation of the move-lower.

EUR/JPY Hourly: Bears Take Control Off of the Friday High

EUR/JPY Technical Analysis: Bears Push to Support, but Will Bulls Respond?

Chart prepared by James Stanley

The bigger question at this point is one of longer-term direction: EUR/JPY was strong throughout much of last year; and after an evening star formation printed on the daily chart with price action from Thursday, Friday and Monday of this week, near-term momentum has moved into a considerably bearish state. This leaves traders with the choice of following near-term momentum with the expectation of a reversal of the longer-term bullish trend, or to wait for price to hit longer-term levels of support in the effort of substantiating longer-term bullish plays. The daily chart of EUR/JPY may provide a bit of clarity on the matter, or at the very least help the trader determine their approach to the situation.

From September of last year into mid-December, EUR/JPY stuck within a fairly strong range. Resistance was showing at 134.41, or the 61.8% retracement of the 2014-2016 major move in the pair, while support was showing in a zone from 131.43-132.05. There were multiple inflections on each side of the range until prices finally posed a top-side break towards the end of the year. This led all the way into Friday’s fresh two-year high at 136.64. But since that high moved into a bearish pattern, few signs of support have been evident just yet, and this keeps the door open for two areas of importance. We’re fast nearing a trend-line projection that can be found by connecting the August low to the November low. And just below that trend-line is the same area of support that had become commonplace in Q4, running from 131.43-132.05. Each of these remain as potential support plays in EUR/JPY. Given how quickly this bearish move has come-in, traders will likely want to wait for support to settle-in before looking to buy; even at risk of giving up some of the topside move.

EUR/JPY Daily: Fast Approaching Longer-Term Support Zone, Trend-Line Projection

EUR/JPY Technical Analysis: Bears Push to Support, but Will Bulls Respond?

Chart prepared by James Stanley

For bearish approaches: Considering how fast and by how much this move has priced-in, traders would likely want to approach the short-side of EUR/JPY with caution. Short-term momentum strategies could allow for down-side entries; but with prices fast approaching longer-term support, profit potential and risk outlay become a concern. A down-side break of 131.00 could open the door for longer-term bearish approaches, as this would provide a fresh four-month low combined with a break of the support zone that held up the range so well to close out last year.

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

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