GBPJPY could be on the verge of breaking down.
Since January 3rd, the risk-sensitive pair has been in rally mode. Buyers managed to claw back nearly 1,500 pips year-to-date.
However, a view of the price action since this time last year depicts a downtrend.
In fact, GBPJPY has been trending lower since the 2007 high.
The pair hasn’t managed to carve lower lows, but the lower high in mid-2015 is indicative of the longer-term momentum.
So was last week’s selloff the start of the next leg lower?
It’s possible, but we need confirmation. That’s where technical patterns like channels and wedges come into play.
In the case of GBPJPY, the price action since January 3rd has formed what appears to be a rising wedge.
It’s more speculative than most patterns in the sense that the pair hasn’t tested support and resistance more than once.
Even Friday’s move to 144.60 was technically the first retest of wedge support.
But that doesn’t mean it won’t produce something worthwhile.
The key will be to watch how buyers and sellers react to this 144.30/60 area this week.
Notice too that there is a short-term horizontal level in the area. The 144.80 level was responsible for capping the late-January advance.
It also delayed the late February rally for a few days.
Based on everything above, I think GBPJPY shorts today may be premature.
If you’re holding short from last week, that’s a different story.
But if you’re looking for a new opportunity to sell the pair, it may be best to wait for a daily close below the 144.60 level.
The “daily close” refers to the New York 5 pm EST close. These charts are required for trading price action.
Click here to get access to the same Forex charts I use.
And if you want to be more conservative, waiting for a close below former channel resistance near 144.30 isn’t a bad idea.
A break lower could have ample room to run. The first key support doesn’t come in until 141.15.
And if this wedge pattern plays out like most, we could see GBPJPY trend lower toward the formation’s inception point at 133.80.
Keep in mind, however, that as long as GBPJPY is above 144.30 on a daily closing basis, the pair is susceptible to bounces.
Key resistance comes in at 149.50.