The past trading week brought many surprises and sudden rallies in the Forex market. The British Pound charted the best weekly candlestick in 14 months amid Brexit optimism, U.S. stock indices recovered mid-week losses on the back of trade talks with China, and Oil prices soared after a missile attack on Iranian tanker in the Middle East. Although I suppose most of those rallies were fake as they were based on empty expectations. Thus the rule ‘buy rumours sell facts’ might be applied to this upcoming week as the technical sentiment shifted for many assets. I decided to have a close look at the EUR/JPY cross rate from a technical point of view to avoid too much dependence on the U.S. geopolitical and monetary concerns in terms of greenback’s volatility.
EUR/USD and USD/JPY were moving in the same direction this past week. That coincidence helped EUR/JPY to show the strongest weekly performance since September 2018. The gain was impressive (+1.97% or 232 pips), which is quite unusual for such a slow-moving pair. Of course, when I open the weekly chart of German DAX 30, which soared almost 4% last week, I understand the fundamental background of that rally. However, technicals tell me that that was just a retracement so far, and here is why.
The weekly chart below shows that EUR/JPY is approaching a strong resistance range. The bulls were unable to breach even the first resistance represented by the 21-week exponential moving average (119.92). The rate is below all of the three curves since October 2018 and there were several attempts to test resistances from below. All of them were limited by the EMA34 (121.24). Average Directional Index points to strong momentum with the positive surplus. However, the beginning of the current week forced the mainline to nose-dive toward the threshold, which might indicate that the bullish power is getting exhausted. The 13-week RSI is still below the middle line (50), which also underlines that the long-term bearish trend is still in play.
Below is another version of the weekly chart setup. The Ichimoku Cloud with a modified set of periods (13, 21, 55, 21) has a closer resistance level than EMA21. The Base Line curve comes at 119.61, and it was not breached as well. The leading span’s bottom is placed at 119.11, while the surplus is quite negative. Stochastic RSI has just entered the overbought territory.
My point is that from a conservative point of view, it would be reasonable to wait for a bullish whipsaw toward the resistance range mentioned above, and start opening short positions following the long-term trend. Daily signals such as long upper shadows or any sort of bearish divergences might help to find the best entry-level. For example, Parabolic SAR could confirm a bearish reversal once its dots jumped above the price. During the last correction on September 17th, EUR/JPY had a lucrative opportunity to open fresh short positions right after the green candlestick. Something similar might happen this week as well.
Keep an eye out for the opportunity and best wishes in the market this week traders!
This post is contributed by MyFxLab. MyFXLab provides daily technical analysis written by professional traders. The site was founded by former Goldman Sachs FX traders and executives from some of the world’s largest brokers.
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