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GBP/JPY Technical Analysis: Long-Term Trend-Line Coming into Play

GBP/JPY Technical Analysis: Long-Term Trend-Line Coming into Play

Talking Points:

- GBP/JPY Technical Strategy: Flat, Aggressive Top-Side Reversal Setup Identified.

- Significant GBP-weakness combined with JPY-strength have driven the pair lower over the past two weeks.

- Reversals (and GBP/JPY) can be dangerous ways to trade a market; and if doing so, you should definitely be familiar with our Traits of Successful Traders research.

The GBP/JPY pair has a tendency to be a heavy mover. Last week was a great example of that. After finding support on the 183.96 Fibonacci level that we’ve been discussing over the better part of the past few months, the pair put in a dramatic drop on Friday to slink all the way down to a fresh support level near the September lows. This is also near a major psychological level and a long-term trend-line in the pair; but given Friday’s 355-pip dead drop, traders should urge caution moving forward.

First, the trend-line: This is an interesting one because of the span of time that it covers. On the below chart, we’re looking at this trend-line that began in the depths of the financial collapse and has governed price action in GBP/JPY ever since. Its functioned as support and resistance on numerous occasions, and as you can see on the right side of that chart – price action is hurdling lower towards this trend-line.

Created with Marketscope/Trading Station II; prepared by James Stanley

Given the holiday-shortened week, this is a dangerous yet semi-attractive setup. By using this trend-line along with the psychological support at 180 combined with a Fibonacci level just 20 pips lower, traders can look at a ~60 pip stop with current prices to get risk levels below this thicket of support levels. What makes this attractive is the lack of nearby resistance that could allow prices to ascend for a while after that dramatic drop on Friday.

There is a prior price action swing-low at 181.83 that could function as an initial profit target for this purpose, after which 182.50 becomes a level of interest (major psychological level). But perhaps more interesting than 182.50 is the Fibonacci level just 38 pips beyond at 182.88, which is the 61.8% retracement of the most recent major move, taking the low from April of this year to the highs in June.

The bigger, and perhaps more attractive level is at that 183.96 level mentioned earlier; but that is a full 360 pips away from current prices, so traders specifically targeting that level can afford to let the setup ‘work’ by confirming support at 180.00 before looking to trigger.

Created with Marketscope/Trading Station II; prepared by James Stanley

--- 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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