GBP/JPY Technical Analysis: Bear-Flag Breaks, But a New Trend-Line Emerges

2015-11-02 20:21:00

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Talking Points:

GBP/JPY Technical Strategy: Flat
GBP/JPY continued to ride within the bear-flag identified in our last piece, until a major break lower on the back of a ‘no-move’ from the Bank of Japan.
With the Bank of Japan making no-move at their last BOJ meeting, Yen-strength could be exposed should risk-aversion themes come back into markets.

In our last article, we looked at a bear-flag formation in GBP/JPY after the pair rallied off of the September/October lows by over 500 pips. But as we mentioned in that article, this was a prime candidate for a ‘fade’ play as it didn’t look likely that we’d get that extension/increase in Japanese QE that some traders were beginning to price-in. And BOJ commentary ahead of the decision last week helped to propel Yen strength, and all three targets were met within 24 hours of the bear-flag giving way. But that confluent Fibonacci level at 183.96 struck again, bringing in support on Tuesday and Wednesday to see prices continue to drift higher to finish the week. At this point, near-term resistance is coming in on the under-side of this projected bear-flag, so this is still a bearish setup – but a new trend-line has presented itself using the lows of last week (and shown on the below chart in red).

The near-term setup is bearish, and this will remain as such until the swing-high at 188.25 becomes violated, which is also the 38.2% Fibonacci retracement of the 2015 range in GBP/JPY. This new trend-line could provide a short-term profit target, and traders looking to treat the move aggressively could look to place a stop above the daily high at 187, with targets cast towards 185.36 (50% Fib retracement of the 2015 range), 185 (major psychological level), 184.50 (projected trend-line support), 183.96 (50% Fibonacci retracement of the ‘big picture move,’ taking the 2007 high to the 2011 low). Traders wanting to treat the move more conservatively could look to place stops above the previous zone of resistance that runs from 187.50 all the way up to 188.26. With this wider stop, wider targets will be required to justify the risk, at which point that 183.96 level could provide an initial target, followed by 182.88 (61.8% of the 2015 range), and then 181.00, which was the swing low to end September going into October, and providing the basis of the most recent bear-flag formation.

Alternatively, bulls may be able to look for a top-side continuation play using the 185.36 level as a basis for stop management. Should price action move back into that up-ward sloping bear-flag formation, this could provide motive for top-side plays going into that prior zone of resistance from 187.50 to 188.25. Traders utilizing this strategy would likely want to lodge stops just under the 185 level, as this is a major psychological level. In this stance, targets at 187.50 (major psychological level), 187.84 (38.2% of the 2015 range) and then 190 (next major psych level) could become attractive.