EUR/JPY – Technical Signs for an Imminent Bearish Swing

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EUR/JPY - Technical Signs for an Imminent Bearish Swing

The EUR/JPY started the week rallying, up from a price consolidation that ended last week. However, as we get ready for the 7/15 trading session, we should consider some technical signs that point to an imminent bearish attempt. Even if this theory is wrong, the reward to risk is favorable.

EUR/JPY 1H Chart 7/14
EUR/JPY 7/14 1H Chart(click to enlarge)

Here are the reasons based on the 1H chart:
1) The prevailing trend in the short-term in bearish. Price has fallen at the start of July from 139.28 to a low of 137.50 last week.
2) There is a falling trendline coming down from July’s high of 139.28 connecting to a resistance pivot from last week at 138.76, and price is tagging that trendline.
3) Price touched the 200-hour SMA and is still trading below it.

Reward to Risk Consideration:

Reward: Since the trend is bearish in July, and before that as we will see later, we can expect a potential downswing to challenge the current low of 137.50, with no reason to believe it won’t break. But this is a short-term trade idea in the 1H chart, and we should deal with short-term expectations. Therefore, to be conservative let’s say 137.50 is the potential target for the short-term. An entry around 138.30 gives us a potential of 80 pips. 

Risk: If price moves above 138.50, EUR/JPY will lose its bearish structure formed in July. If the RSI pushes above 70, we are also seeing some near-term bullish momentum that would suggest further consolidation against July’s downswing. With this in mind, for an intra-session trade, a stop might be placed above 138.50, ie. 138.65.  Entry from 138.30 would risk a potential loss of 35 pips. We might want to give it some more elbow space because a break above 137.76 might be needed to suggest the end of July’s bearish trend swing. If we put the stop above that 138.76 pivot, let’s say 138.85. The risk would then be 55 pips.

The 80:55 reward to risk is not so attractive, but it does allow more elbow space to stay clear of some near-term volatility risk. We also know that even a break above 138.76 is not a guarantee our bearish continuation idea is dead. A clear-out is possible, but at least we would give that scenario some elbow space too.

The 80:35 reward to risk ratio is favorable as it is better than 2:1, which means, if you are wrong half the time, you will have a profitable trading performance with enough trades. However, given the trade less elbow space means exposing the trade to more near-term volatility risk. It is a trade-off as always between your assumed reward to risk, to assumed probability of the trade working.

Without over thinking it, you can juggle between these two trade-offs.

Now let’s just take a look at the bigger picture to make sure we are not in the middle of a bullish trend planning for a bearish trade.

EUR/JPY 4H Chart 7/14
eurjpy 4h chart 7/14(click to enlarge)

The 4H chart shows a market that has been consolidating during a downtrend. Here are some observations:
1)  There was a failed rally attempt in June, where price popped up to 139.28, but failed to establish a price bottom against the  prevailing bearish trend in the 4H chart. This can be considered a clear-out because the prevailing trend was bearish, and the price action after the pop made a new low at 137.50.
2) The RSI has tagged 30 many times, but failed to pop up to 70, which suggests bearish but choppy momentum.
3) If we look at the market since the end of June, we are seeing bearish development as the RSI dipped to 30 but has failed to climb back above 60.
4) And price has simply made lower highs and lower lows.
5) Price action also shows a break below a rising trendline, and now a pullback that is still able to confirm the bearish outlook if it comes back down below that line.

Final word: The 4H chart basically shows that this is also a breakout/pullback trade idea. A break below 138.20 can kick start the next bearish swing, so look out for that in the 7/15 session.

To contact the reporter of this story, email Fan Yang at fan@forexminute.com
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Fan Yang has been a professional forex trader and analyst since 2007. He specializes in technical analysis and has a Chartered Market Technician designation since 2011. He was the chief technical strategist at CMSFX He was also the founder and chief currency strategist at FXTimes Over the years, Fan has not only been a trader and analyst but also an educator. As a proponent of both technical and fundamental analysis in trading, Fan advocates simplicity and discipline as key factors in making trading decisions when faced with so many "clues" and "signals". Currently Fan Yang is the chief currency analyst and webinar instructor at forexminute.com.