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Talking Points:
- GBP/JPY Technical Strategy: Flat, aggressive reversal setup stopped out last week.
- Sterling has continued its pattern of weakness against the Yen since the most recent BOJ-announcement.
- With the BoE taking a dovish stance towards rate hikes combined with this most recent BOJ-non move, the fundamental environment points to additional weakness for GBP/JPY moving forward.
In our last article, we looked at an aggressive reversal setup in GBP/JPY after price action had run down to find support off of a multi-year trend-line. The attractiveness of the setup was in the potential risk-reward in the event of a trend-line inflection off of that trend-line. But that trend-line and the psychological support level were not enough to contain the selling in GBP/JPY, and that stop was promptly consumed by falling prices in GBP/JPY.
This does, however, point to the potential for a ‘bigger picture’ trend emerging as we move closer to 2016. Central Banks from the UK and Japan have already pretty much shown their hand. The Bank of England is looking relatively dovish after Novemeber’s Super Thursday announcement; and the Bank of Japan, as much as they might want to, will likely have difficulty if looking to increase or extend QE. That’s the type of thing that happens when a Government Pension Fund loses $64 Billion on a really bad trade: Risk aversion. At least it should happen. If it doesn’t, that’s probably more troubling than anythign else, but that’s a matter for another day. But the point of this is that the fundamental environment may be pointing to additional losses in GBP/JPY, and this meshes beautifully with what we’ve seen on a technical front of late.
That trend-line intersection that we looked at last week was a significantly confluent level: We had the 6-year trend-line, the 180.00 psychological support level and the 76.4% Fibonacci retracement of the most recent major move all within a 20-pip zone. So, for this level to have not held during a holiday week is significant. It means that traders were willing to push the envelope to fresh lows even in a low-volume environment. On top of that, we’ve seen a textbook break of that trend-line, as prices put in three days of resistance at projected old support; yet another technical sign pointing to additional downside.
Now on to the rub: After sinking below that confluent zone of support, price action has found its way down towards another Fibonacci level, this time the 61.8% retracement of the secondary move at 178.03. This could be a prime profit target for short-side positions, and this is where things begin to get murky. The nearest swing on the daily chart is at that 180.03 level and that would be approximately 130 pips of risk from current market prices. So an 75-pip target with a 130 pip stop isn’t really an attractive way to trade for a new trend.
However, should a swing-high develop south of that 180.03 level, then we have a lower-high and this could be an ideal point of initiation for a short-position in GBP/JPY. Traders can look for this swing high by looking for an extended wick on the top-side of a candle on the 4-hour or Daily chart over the next week. This could allow for more advantageous stop placement and a more attractive risk-reward ratio down to that 178.03 level. Even more attractive would be an evening-star formation on the 4-hour chart.
But at current prices, the risk-reward is simply not attractive enough to chase a potentially new down-trend until a more clean setup becomes available.
Alternatively, should the down-side move continue to develop, traders can institue similar logic with current support. If prices break below 178.03, traders can wait for resistance to develop at this zone of prior support before triggering the short-side.
Created with Marketscope/Trading Station II; prepared by James Stanley
--- Written by James Stanley, Analyst for DailyFX.com
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