Daily Price Action

EURJPY on the Cusp of a Much Larger Decline?


There’s no arguing the fact that the Euro has been resilient since mid March despite the constant flow of dismal news surrounding Greece. But how long can the currency hold out? For the answer we turn to simple price action and a pair that has been on my radar since the first week of July – EURJPY.

Why EURJPY and not EURUSD?

Put simply, the technical structure of EURJPY is more favorable than that of EURUSD. Of course if one becomes pressured to the downside it’s likely that the other will follow, but I always gravitate toward the more favorable technical pattern when choosing between two or more currency pairs to trade.

However before we get into the technical pattern in question, it’s important to understand that this is a potential setup. In all likelihood the pair is a week or two away from confirming the pattern and there is always the chance that it may not play out, in which case we will remain on the sidelines.

With that out of the way, the head and shoulders pattern that has been forming since early May is extremely well-formed and has significant profit potential, if confirmed. That confirmation will only come on a daily close below the neckline at 133.10. This level is represented by the May lows as well as the current low for July.

The great thing about such a pattern is that we have a measured objective which we can use to project a final target. That objective comes in at the 125 handle, or about 800 pips below 133.10. There are also several support levels between these two prices which we can use to pyramid into a short position.

Summary: Wait for a daily close below 133.10 and then watch for a selling opportunity on a retest of the level as new resistance. Key support comes in at 131.50, 129.00 and 126.85 with a measured objective of 125.00. Alternatively, a daily close back above the 138 handle would challenge the validity of the reversal pattern.

EURJPY potential head and shoulders on the daily chart

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