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GBP/JPY Technical Analysis: A Tale of Three Trends

GBP/JPY Technical Analysis: A Tale of Three Trends

2015-10-06 17:16:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: Flat
  • GBP/JPY is carving out higher-low support at a key Fibonacci level at 181.88.
  • Potential higher-low support could open the door for long positions later in the week.

Last week brought continuation to the considerable pain that’s been seen in GBP/JPY of recent, as bids remained elusive for much of the early portion of last week as prices attempted to find a bottom.

The outsized ‘risk-churn’ that took place on Friday after the abysmal NFP report out of the United States sparked risk-aversion as panic levels increased; but within half-an-hour of US equity markets opening, a low was set as risk assets shot higher under the premise that the Federal Reserve would back off of a 2015 interest rate hike. This led to additional risk assumption as stocks and risk assets rallied on hopes of the proverbial can getting kicked even further down the road.

GBP/JPY mirrored both of these directions: The initial ‘risk-aversion’ move on Friday brought prices directly down to the same price zone that had offered support earlier in the week, approximately 180.75 to 181.00. As ‘risk-on’ raged through markets to close out last week after that pitiful NFP report, prices in GBP/JPY shot higher; and opened the week by setting a ‘higher-low,’ off of the Friday close at 181.88, which is the 50% Fibonacci retracement of the ‘secondary move,’ taking the October 2014 low to the 2015 high.

The short-term structure is now bullish reflecting these higher-lows as ‘risk-on’ has come back into global markets, but the intermediate-term trend still remains bearish; at least until we take out the key 184 level in the pair. This price of 184 is a confluent level of support/resistance, as it’s the 23.6% retracement of the ‘big picture move (taking the 2007 high to the 2011 low), as well as 23.6% of the most recent major move (taking the June highs to the September low). The longer-term trend is still bullish, and this will remain as such until the longer-term trend-line connecting the lows of 2014 connecting the lows of 2015 yields to falling prices (shown in dark blue on the below chart).

On the long side: Traders have the luxury of recently-established, nearby support levels. The price zone that we mentioned earlier around 181.88 is now the daily low for two consecutive daily candles as well as being the close of last week, giving an example of ‘new support at old resistance.’ This could be a tight stop for a long position, but if using this level traders would likely want to target above the 184 level of confluent support/resistance; and this could make the long-side more challenging given the heavy amount of price action that’s taken place in this zone recently. The 185 area of ‘psychological support/resistance’ could be a more attractive profit target with a stop below 181.88, as it could more adequately justify the risk outlay. More conservative stop placement could be investigated below last week’s lows, as we had four days of price action ‘grinding’ in the 180.80-181 range, and traders could look to place stops sub 180.65 to wedge stops below the Friday-low.

On the short side: The immediate level-of-interest is at the 183.25 range, as this was the high yesterday and we’ve seen some intra-day support there thus far today. Above 183.25 would be the confluent 184 level mentioned earlier, and should resistance show below 184, this could be a very valid level for stop placement. Potential support may show at 182.50 (major psychological level), 181.88 (50% Fib retracement of the secondary move, mentioned above), 180.80 (last week’s low), and then the zone from 180-180.30 (major psychological level as well as the five-month low in GBP/JPY.

If we are able to break below 180 in the next couple of weeks, the longer-running trend-line may come into play. This trend-line could be seen on your charts by connecting the February 2014 low with the lows of 2015, and the projection of this level doesn’t cross the vaulted 180-level until November. Should price action revisit this trend-line, a longer-term bullish prognostication may be made; but until then – this market is the story of three trends.

GBP/JPY Technical Analysis: A Tale of Three Trends

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

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