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Has the EUR/JPY Finally Topped Out?

Last updated 2/26/2009 2:53 PM EST (GMT -5) 0 Comments - Add your comment

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FX360 Technical Analyst Staff

Technical Analyst, GFT

Earlier this week, we highlighted the EUR/JPY as having "trade of the week" potential (" EUR/JPY Facing Critical Resistance ") based off a highly symmetrical bearish butterfly pattern completion along with additional Fibonacci convergence. We were wrong. Well, sort of....

The EUR/JPY managed to break through that critical resistance tripping our stop-loss. However, we also discussed that if this was to occur, then a potentially strong bullish continuation to the next level of Fibonacci/pattern convergence near 126.00-127.00 was likely, and has now occurred.

After a quick 100 pip dip early this morning prices rallied to an intraday high of 126.08 officially completing the final bearish butterfly pattern as shown on the daily chart below. As a result we are short the EUR/JPY at 1.2595. With risk at 127.12, this setup still carries trade of the week potential as it presents an equally attractive risk-to-reward ratio of nearly 3-to-1 to our first profit target at 122.55 (T1), and over 5-to-1 to T2 at 119.72. 

Prices have now begun to pull back presenting an interesting scenario, and another potential sell opportunity. Although an intraday dip to 125.25-00 is somewhat expected there is still some room to the upside with a potential bearish AB=CD pattern to complete near 1.2630-40 (see 30min). Risk to the short side remains just above the 78.6% retracement of YZ at 127.12 (see daily).

Otherwise, a close below the 30min bear trendline may be enough to ignite selling pressure down to profit targets at 122.55 (T1) and possibly 119.72 (T2). We will look to move stops to break-even if T1 is achieved, take partial profits, and let them run to T2 before closing out this short.

To recap, we are short the EUR/JPY at 125.95 with stop-loss at 127.12 and targets at 122.55 (T1) followed by 119.72 (T2). There is an opportunity to scale into this position with a potential sell at126.31. Additionally, a close below the 30min bear trendline (approximately 1.2500) may signal the bearish correction is already in progress.

Remember, these patterns represent probabilities not certainties. As always, proper risk management is essential as pattern failure indicates a potentially strong continuation move may be in progress.

Daily Chart - Bearish butterfly pattern complete	30min Chart - 30min channel with room up to bearish ABCD pattern completion

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