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GBP/JPY Technical Analysis: Post-Flash Crash Channel

GBP/JPY Technical Analysis: Post-Flash Crash Channel

2016-10-19 19:07:00
James Stanley, Strategist
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Talking Points:

  • GBP/JPY Technical Strategy: Longer-term price action still bearish; post-Flash Crash price action developed into a range.
  • While GBP/JPY is typically a high-flying, heavy volatility pair – price action has been rather subdued over the past week.
  • If you’re looking for trading ideas, check out our Trading Guides; they’re free and updated for Q4.

In our last article, we looked at the deluge in GBP/JPY in the effort of finding some clarity after the out-sized move in GBP around the ‘flash crash.’ But as we discussed, given the masssive drop towards multi-year lows, combined with the aggressive selling in GBP after news of a ‘Hard Brexit’ came about – traders would likely want to move forward in GBP/JPY with a great deal of caution. We specifically wanted to look at price action zones around the ‘big figures’ of 125.00 and 130.00 in GBP/JPY in the drive of prudence around what is traditionally a highly-volatile pair.

In the week since that last article, volatility in GBP/JPY has tamed a bit as a ~200-pip range has developed. This range can be seen as an upward-sloping channel that has a slightly bullish bias; with slightly higher-highs and slightly higher-lows. This is somewhat indicative of a market without significant conviction; and as we discussed last week this is likely resultant from the fact that both currencies are being or have been driven weaker by extremely dovish monetary policy. In the U.K., the Bank of England has already launched a ‘bazooka’ of stimulus and there is the thought that more accommodation may be coming as ‘Hard Brexit’ appears more likely. And in Japan, the Yen has seen continued resistance as markets factor in the probability of even more stimulus at some point in the future.

The price action channel that has formed over the past week can be dangerous given the fact that ‘longer-term’ support and resistance in the channel is more than 200 pips away from support or resistance. So for the trader looking to buy support in the channel, they’d likely want to look at stops below the ‘flash crash’ low of 125.00. And on the converse, for traders looking to take short positions off of the resitsance portion of the channel, this is would be more than 150 pips away from the ‘big picture’ resistance level at 130.00.

And given GBP/JPY’s traditional propensity to be a ‘big mover,’ traders would likely want to continue to move forward with a great deal of caution; being extremely picky on entries. For short-side strategies, this could be resistance from the zone between 129.25-130.00. And for bullish approaches, support developing above 125, and perhaps more attractive, support developing at or above the 126 handle that saw a brief higher low last Wednesday, could open the door for top-side approaches. At the very least, with such an approach of prudence traders will be able to control the risk on the entry as opposed to being in a position in which they have to take a wide-stop on a volatile pair that’s in the brief lull of a range.

GBP/JPY Technical Analysis: Post-Flash Crash Channel

Chart prepared by James Stanley

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

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