The divergence across global markets continues to grow following last week’s UK decision to leave the EU. Many of the broad market indices have either erased all post-Brexit losses or are less than 100 points away from doing so.
But although the equity markets have shrugged off last week’s surprise outcome, other markets aren’t so convinced that the carnage is over.
The Japanese yen, a currency that is typically inversely correlated to equities, hasn’t budged. In fact, the currency continues to hold its ground despite other correlated assets giving the “all clear” signal.
The EURJPY, for example, has only managed to gain 500 pips from its post-Brexit lows, yet indices like the Dow Jones Industrial Average have rallied 900 points during the same period.
That may not sound too extreme so let me put it differently. The Dow is less than 20 points away from erasing the entire post-referendum selloff while the EURJPY is 750 pips away from doing the same.
But it isn’t just EURJPY. A similar pattern is present on other yen pairs aside from the obvious candidates in the Euro and the pound. The USDJPY, AUDJPY, NZDJPY, and CADJPY are all still well off of last Friday’s session highs.
So what is this divergence telling us?
It’s hard to say at the moment. But one thing I do know is that a market’s unwillingness to participate in a risk-on or risk-off event is typically a sign that one of the two moves is false. In other words, either risk assets need to adjust lower, or the yen needs to capitulate.
Luckily for us, we have some clean technicals to help us assess the situation on EURJPY. First is the confluence of resistance that lies just above current prices at 115.50.
The weekly chart shows this area well.
As you can see from the chart above, two critical levels come together in this general area. Also of note is that 115.50 is the 61.8% Fibonacci retracement when measuring from the 2012 low to the 2014 high.
However, I’m not a fan of simply selling at resistance or buying at support when conditions are this volatile. In situations like this, the lower time frames can be helpful to gauge the level of interest for both buyers and sellers.
Of course, this doesn’t mean that we need to trade from a 1-hour chart (below). A daily bearish pin bar at the 115.50 handle next week would be far more appealing in my opinion than any breakout on a 1-hour closing basis.
But that’s part of the beauty of trading – the fact that there is no one “best” way to do something. As always, the best approach is the one that works for you.
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