Weekly: The week beginning February 22 saw GBPJPY meet the 50% Fibonacci pullback at 156.31 (from 116.81 to 195.81) and the 261.8% Fibonacci extension at 155.58 (from 195.81 to 180.45).
The proceeding 15 weeks has seen the pair in a consolidation period with mixed and volatile price action evident, common in corrective sequences.
However, next week could see the bears regain control. Unless there is a substantial rally today, the weekly chart will post a bearish outside bar for this week and further downside would be expected to follow.
Daily: The mixed and volatile trading for the last 15 weeks has seen the pair form an ascending triangle pattern on the daily chart which has a bias to break to the downside. The rally from early May was met with a bearish outside day on Tuesday and led to an impulsive selloff this week. This, along with the bearish outside candle on the weekly chart, indicates that a downside breakout of the triangle could be imminent.
The downside move faces initial support at the triangle base at around 155.60. If the pair breaks from the triangle to the downside, we would be presented with two targets. The initial target would be the triangle base/ April low of 151.62, followed by the formations measured move target of around 143.25.
This being said, we view this second target as a long-term potential target as opposed to a medium-term target.
A level to note which we would expect the pair to find support prior to the second triangle formation target would be the 61.8% Fibonacci pullback level of 147.00 (from the 116.81 to 195.81 move).
Our medium-term call for GBPJPY would therefore be to sell a clear break of the triangle base of 155.60, targeting levels close to the triangle base of 151.62. A fairly pivotal level over the past few weeks has been 156.20, so we’d look to place the stop for the trade above here.
These trade parameters would set us up for a reward/ risk ratio of over 3:1.
Management and risk description
After prices reach the first target, move stop to entry and look for an extended move to 143.25.
Entry: sell GBPJPY on a break of 155.20.
Stop: a move back above 156.30.
Targets: 151.70, 143.25.
Time horizon: medium term.
Daily chart (bearish ascending wedge):
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Source: Saxo Bank
Source: Saxo Bank
— Edited by Michael McKenna
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