As Yen crosses fell across the board on Monday, there was one holdout that I mentioned which has a lot of potential. That cross is EURJPY.
At the time of that writing the pair was trading at 137.60 and is now hovering around 135.70. Needless to say the pair has been under considerable pressure to start the week.
Despite this 190 pip drop, I believe that the downside potential for this pair has yet to be realized. In fact today’s price action is just now cracking below a key support area that was mentioned on Monday as being a key technical catalyst for a move lower.
The upper boundary of that area is represented by 137.00, which was broken during yesterday’s session by almost 20 pips. That left it up to trend line support from the April low to keep this pair afloat, but so far today the bears are winning that battle with conviction.
EURJPY is currently trading 100 pips below trend line support and has already confirmed the break on a 4 hour close. However given the volatile market conditions of late, it would be prudent to wait for a daily close at 5pm EST before further consideration.
As for support levels to the downside, we have 135.00 and of course 133.10. The latter marks the neckline of what could be a four-month head and shoulders pattern, a formation that typically signals a reversal.
While the right shoulder has become a bit extended, the pattern itself is still intact as the high at 141.00 still stands well above the right shoulder. This means that a break of 133.10 could trigger a move as low as 125.00 over the coming weeks.
However keep in mind that the pair has to breach several levels of support, namely the 133.10 handle, before such gains can be realized; so be sure to keep the longer-term potential in perspective with any short-term gains.
Summary: Watch for a selling opportunity on a daily close below wedge support which should now act as resistance. Key support comes in at 135.00, 133.10 and 131.50.
The chart below illustrates the four-month head and shoulders pattern. We need a daily close below the neckline to confirm the pattern and trigger what could be a much larger move to the measured objective at 125.00.
