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GBP/JPY Technical Analysis: Fibonnaci Resistance Offers Short-Side Setup

GBP/JPY Technical Analysis: Fibonnaci Resistance Offers Short-Side Setup

James Stanley, Senior Strategist

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Talking Points:

  • GBP/JPY Technical Strategy: Flat, short setup identified
  • The rally in GBP/JPY has brought prices up to Fibonacci resistance in the pair; offering the potential for a short-side setup.
  • With the potential for Yen-strength under the scepter of risk-aversion, short GBP/JPY could be attractive should the ‘panic theme’ come back into markets.

In our last article, we remarked how GBP/JPY was putting in three very different types of trends based on the time frame being investigated. Longer-term, we have a rather strong up-ward sloping trend-line that’s supported price action since February of 2014. This trend-line can be found by connecting the Feb 2014 low to the April of 2015 low, and recent price action has been making a strong movement to re-visit the projection of this line. This brings us to the second trend; which has been a strong movement lower as fears of global economic weakness have begun to permeate into financial markets around-the-world. This has seen GBP/JPY trade lower by nearly 1,200 pips since the high was set in June of this year; right as Chinese markets began their tumultuous run lower.

And as we identified in our previous piece, the short-term trend was to the up-side as a recent ‘higher-low’ had been carved out as new support was established at 181.88. The first identified target of 184 has already been met; and price action throughout the day may be opening the door for a short position. This could align the near and intermediate term trends, with targets cast towards that long-running trend-line.

The level of relevance for short positions is the 184 confluent level of support/resistance. This is the 50% Fibonacci retracement of the ‘big picture’ move in GBP/JPY, taking the high from 2007 to the low of 2011, as well as being 23.6% of the most recent major move, taking those June 2015 highs to the low set in early September. But perhaps more importantly, recent price action has offered multiple iterations of resistance off of this level; thereby opening the door for a short-side reversal play. Traders could look to place stops above 184.50, with targets set towards 182.50, 181.88 and then 180.

Alternatively, traders could take a more conservative approach by waiting for prices to begin moving lower to further validate this resistance. With that, traders would likely want to squeeze the stop a little closer to that 184 level in the effort of keeping risk-reward attractive, but the same targets would apply.

On the long side, traders would likely want to exercise caution. The rip in GBP/JPY over the past four trading days has throttled through numerous levels, so managing risk of a longer-term long position could be costly with current price action. Traders can wait for 184 to give way to prove that strength may continue in GBP/JPY, at which point targets at 185 (major psychological level), 186.24 (38.2% Fib retracement of the most recent major move), and then 188 (50% retracement of the most recent major move).

GBP/JPY Technical Analysis: Fibonnaci Resistance Offers Short-Side Setup

--- 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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