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GBP/JPY Technical Analysis: From One Trend to Another

GBP/JPY Technical Analysis: From One Trend to Another

2015-11-09 20:24:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: First two targets for short setup in last article already met, one remains.
  • The pair saw a 360-pip downward movement on the Bank of England’s dovish tone on Super Thursday.
  • With the BoE now taking a dovish stance with concerns on global growth, continued weakness in the pair could be exposed.

In our last article, we looked at the recent break of the bear-flag formation in GBP/JPY; and as we notated, a new trend-line had emerged on the under-side of price action (shown in red on the below chart). The big driver of this initial bear-flag break was the lack of additional QE at the most recent Bank of Japan meeting on October 30th. As we discussed in that last article, investors had begun to sell the Yen in anticipation of an extension of that QE-program; and when combined with the previous theme of Sterling strength on the back of rate hike hopes for early 2016, this led to massive strength in GBP/JPY.

But when the BOJ didn’t deliver, traders bought Yen and the bear-flag formation in GBP/JPY finally gave way. Within 24 hours, all three profit targets from the previous short-setup were met, as near-term support developed in the 183.96 area, which is the 50% Fibonacci retracement of the ‘big picture move’ in the pair, taking the 2007 high to the 2011 low). But as this support developed, another trend-line became evident, and this can be found by connecting the low on 10/28 to the low from earlier in the month on October 2nd. This, when combined with the swing-low on October 13th gives us three points-of-touch, thereby confirming and validating this as a trend-line.

And as we mentioned in that last article, don’t be surprised to see price action revisit this level in the coming days…

It really only took three days, most of which were spent with price action catching resistance on the under-side of the former bear-flag formation… but when we got to Super Thursday, matters changed dramatically. The Bank of England took a surprisingly dovish-tone, and this caught markets by surprise as the Sterling sold off aggressively against most major currencies, the Yen included. GBP/JPY put in a ~370-pip down-side run that ran directly into that trend-line for the daily low of last Thursday.

Friday brought a follow-through move that finally saw price action break below the secondary trend-line, albeit briefly, as buyers came in ahead of the market close to create a Doji formation on the daily chart.

At this point, there are setups on both sides of GBP/JPY. The short-term setup is bullish, looking for continuation of that Friday top-side momentum that brought price action above this secondary trend-line. The intermediate-term setup is bearish, looking for a continuation of the down-ward momentum that broke the bear-flag two weeks ago and furthering the pressure brought into the pair on the BoE’s dovish tone on Super Thursday. Traders can use this recent price action on Super Thursday to help plot their approaches moving forward. By drawing a Fibonacci retracement around this range, taking a high of 187.67 and a low of 184.29, traders can find shorter-term levels that can be used to substantiate risk levels.

On the 4-hour chart below, we can see near-term support off of the 186-region. Traders can look to place stops below the 38.2% Fibonacci retracement of this most recent move around 185.50, with top-side targets at 186.38 (the 61.8% retracement of that same move), 186.87 (the 76.4% retracement), and then 187.50 (major psychological level, and near the previous-high).

For the longer-term short setup, traders can look to lodge stops above that 186.87 resistance level, with targets set towards 185.58, 185-even (major psychological level), 184.29 (last week’s low), and then 183.96 (50% retracement of the ‘big picture move’ as well as the previous week’s low).

GBP/JPY Technical Analysis: From One Trend to Another

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

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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