GBP/JPY Testing the 200-Day SMA Again

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GBP/JPY Testing the 200-Day SMA Again

Backdrop:

GBP/JPY has been choppy throughout 2014, but we can see a bullish bias to this madness. In fact, there has been higher lows and a fresh high on the year at 175.36 in July. But after that, price have been mainly bearish. Price came down to test the 200-day simple moving average for the first time November 2012, during August.

Price bounced off the 200-day SMA and headed higher, signaling bullish continuation with a break above the 100-day and 50-day SMAs and more importantly above a falling trendline from July’s high.

GBP/JPY Daily Chart 9/6
gbpjpy daily chart 9/6

(click to enlarge)

The breakout however did not extend, and last week, price immediately fell back failing to break above 174. By the end of the week price tagged the 171.00 handle but closed just above the 200-day SMA around 171.35.  So here we have a market at the cusp of shifting from a neutral-bullish mode to at least a neutral-bearish mode, and perhaps a bearish mode for the medium-term.

The GBP/JPY is now at the cross road, wish some short-term bearish bias. I think if price returns back above 173.00, the bearish outlook should be shelved, and the market is back to neutral-bullish mode. Note that this would push price back above the 100- and 50-day SMAs.

Trade Idea:
So, if we are to take a bearish stance here, we might want to wait for a rally to the 172.50-173.00 area. Looking at the 4H chart, this would mean a pullback to a key resistance cluster. We should also monitor the 4H RSI – if it stalls at 60 while price also stalls in the 172.20-172.50 area, we can anticipate a bearish swing.

GBP/JPY 4H Chart 9/6
gbpjpy 9/6

(click to enlarge)

Conservative R:R assessment:
In a reward to risk assessment, let’s say the stop-loss is 173.30, while the entry is at 172.30. That is 100-pips of risk. The target would conservatively be the 170.50 area, near the August-low. That would yield a 180-pip reward. This trade idea thus has a 1.8:1 reward to risk profile.

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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.