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EURJPY – Further Downside Seen

Dee Rooney, Alpari analyst contest participant

The monthly chart of the EURJPY currency pair shows the negative divergence with RSI which warned of a trend reversal. The pair reached 150.00 before heading lower to current levels (around 127.45). With RSI trending down and MACD about to cross the zero line, the pair looks set to move lower. Fibonacci retracement levels provide useful downside price targets as do horizontal support and resistance lines (blue).

Looking at the weekly chart, we see a little more granularity of price action: there is a clear falling price channel which is formed by linear regression of the last 39 weeks candles: The central line is the average and the upper and lower lines represent a two standard deviation move from the average trend line. You can see that current prices are hugging the lower support trendline accompanied by falling RSI and MACD. It is possible that prices may bounce off this lower 2 standard deviation level and head back towards the average (or mean). The piercing line of the current candle is at 129.00 and if the pair were to move above this level, a reversal to the mean is likely. However, if prices were to move more than 2 standard deviations from the mean i.e. below the lower channel trendline, then a significant move to the downside may occur.

Looking at the 4 hour chart below, the currency pair is oversold and in my opinion, a bounce from recent support is likely.

Given that we do not know whether the downtrend will resume or prices will recover to the mean or perhaps higher, traders may wish to establish a short position at resistance around 129.00 or wait for this pair to resume the downtrend and enter below 126.00 when support has been broken.

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