Is There More Downside Ahead?

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For some time I have been watching the Yen pairs, looking for signs of weakness.

In the previous post, I discussed the EUR-JPY, although most of its counterparts are very similar. Details vary, but the general theme is the same – these instruments could be overextended are subject to corrections. So far, longer-term charts, like the dailies and the weeklies, remain strongly bullish and not indicating reversal. This made me shift focus to smaller time frames, where corrections should develop first. While the potential for profit is also smaller, trades on the hourly and lower charts tend to work themselves much faster and with better-defined risks.

EUR JPY 01 14 Is There More Downside Ahead?

I considered two options for shorting the EUR-JPY on Monday. One was using the hourly chart, after emergence of a bearish reversal pattern. The other idea was based on tracking latest lows on the 15M chart. Because this pair made a new high out of the blocks, reaching the 120.00 handle, first signs of correction developed on the 1H chart. Few hours into the trading week, the price formed a dark cloud cover bearish reversal pattern, the short entry signal. Admittedly, this pattern was relatively soft, emerging in relatively quiet trading. On the other hand, risks were very small, so entry at 119.93 was a decent option.

EUR JPY 01 14 a Is There More Downside Ahead?

This turned out to be a good trade, with the EUR-JPY falling for the next several hours. My exit was at 119.00 for a healthy gain. At this level, the price filled the opening gap, meeting my expectations. While the price dipped a little lower later on, for all practical purposes this trade captured all of the immediate potential. The difficult part now is to determine whether this was only a normal reactionary price swing, or perhaps the start of a significantly larger correction in this pair.

EUR JPY 01 14 b Is There More Downside Ahead?

Reality is that we simply do not know yet. Even though I think this pair is ready for additional selloff, I need to see the price to start moving lower in order to become convinced. We can use the 15M (or 1H) chart again, paying attention to Monday’s extreme of 118.85. This has become the new active support, which must be cracked before we can confirm a bearish trend under development. From the short-term perspective, the 118.85 level is the area to watch.

EUR JPY 01 14 c Is There More Downside Ahead?

Another consideration goes to the daily chart. Monday’s price action is forming a possible reversal pattern. It is important to note that the day is not over yet and things could change, but very likely, we will see a doji or a shooting star. Both of these would put a bearish skew on this chart. One could simply sell it at the start of Tuesday or even use binary optionsin order to limit risks. I prefer to use lower magnitude charts, but this development here could influence many large traders and have a significant impact on the EUR-JPY. We shall see….

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