GBP/JPY Technical Analysis: New Trend in Play after 800-Pip, 3-Day Romp

2016-11-11 13:47:00

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Talking Points:

GBP/JPY Technical Strategy: Intermediate term-price action turning bullish after 800+ pip run over past three days.
The range in GBP/JPY has finally resolved itself after an aggressive top-side break.
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In our last article, we looked at GBP/JPY while it was suspiciously trading in a 200-pip range. Suspicious because this is GBP/JPY; and ranges are the exception and not the rule. And with such a context, trading a range can be dangerous as there could be a higher probability of getting a stop gapped through, which can completely throw off a trader’s potential risk/reward when there’s a chance that the risk is actually greater than expected. So rather than trying to trade a range in a traditionally volatile pair, we wanted to wait for signs of a new trend to present itself and that may be what we’ve seen over the past three trading days.

As news of Donald Trump’s likely win made its way through markets, risk aversion began to show as the ‘shock factor’ of a Trump win caught many by surprise. This drove GBP/JPY lower by 350 pips, right back down to the support zone that we had looked at in that prior range. But at around Midnight Eastern Time, ‘risk off’ turned into ‘risk on’ in a very big way, and GBP/JPY began to shoot-higher, and hasn’t really shown any signs of stopping as prices have moved higher by more than 800-pips off of Wednesday’s low.

At this point, we’ve seen multiple points of resistance broken and the pair is trading at a two-month high. The fundamental backdrop behind GBP/JPY could support a continuation of higher prices after the Bank of England reversed their prior dovishness in respect of rising inflationary pressures, and this can provide an accommodating backdrop for the development of a new up-trend.

At this point, traders will likely want to wait for support before looking to trigger long, as the prior swing is now more than 800-pips away. Price levels at 133.20 (the Brexit swing-low) or 131.75 (the most recent swing-high) could offer areas in which a ‘higher low’ in the pair could develop.

A bit deeper at 130.00 we have a very interesting area of confluence, as a long-term trend-line projection has continued to offer support/resistance inflection and also aligns with a pivotal psychological level. This trend-line can be found by connecting the low in September of 2011 with the low in June of 2012. The projection of this line runs into current price action, and is shown below in red with recent inflections indicated with red boxes. Should prices correct down to this level, the long-trade can still be investigated; but if we get a significant break below that zone, the bullish bias should come into question as prices action moves back below this long-term trend-line of support.