EURJPY Showing Two Potential Bearish Patterns Unfolding

Last week EURJPY closed at a 4-week low, with the body of the candle engulfing the prior 3 week’s, breaking the bullish channel from March ’13. Whilst the break of the trendline (lower channel ) would traditionally target the base of the trendline itself, with this setup we can be a little more reserved with our targets today as this trendline is over 1-year old. However it does appear to at lest be forming an interim top with March 14 high creating a lower-high from the Dec 13 high, with subsequent price action ranging tightly yet lower. Last week’s close was the most bearish single week in 2-months and the close below the trendline adds extra confidence of a bearish follow-through.

EURJPY Weekly (click to enlarge)

I see 2 potential bearish patterns in the form of a Triple Top, or a Descending Triangle. The latter would mean we can expect price to ricochet between 139.80 support, the broken trendline and the descending trendline from the suspected triangle.

For now however I favour the triple top and a bearish follow-through sooner than later. Yesterday’s candle closed near the lows of the 3-day range after rejecting 141 resistance and broken trendline. One approach is to set a sell-limit within yesterday’s range and a stop above 141 (maybe even above the monthly pivot) to anticipate the downside break. Obviously the risk here is the downside break never occurs and you get stopped out.

EURJPY Daily (click to enlarge)

Alternatively you can seek a sell-stop order below the breakout zone with an eventual target near the 136 lows as projected by the Triple Top. As before there is always the risk of a bad trade and you may end up entering on a ‘fakeout’. To be fair I do not like breakouts on FX, but that is my personal preference.

A 3rd approach is to wait for the downside break and seek bearish setups on the intraday timeframes to trade towards 138.80. This is my preferred approach – but as always, the decision is yours.

By Matt Simpson | Senior Market Analyst at ThinkMarkets

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