The GBP/JPY on the Daily chart since Jan. 23rd of this year steadily climbing from roughly 119 to a brief flirtation with 150 (aka 3100 pips). The climb has been steady and consistent spending the majority of its time above the 20EMA. However, the channel which it seems to have carved out for the last 3mos seems to be breaking down and presents us with large downside opportunities.
Taking a look at the daily chart below, we can see how the pair has maintained the orderly climb. Some of the key points are how the pair has only had short sojourns below the 20EMA (once above it in Feb.) and each trip below produced a long wick to the downside and then found its way back up quickly. However, this is different as of late where its spent the longest time below the 20EMA and has treated it as resistance for the last 5 days. On top of this, there is no wicks to the downside suggesting the buyers are not as interested in coming in.
Taking a look at the other details of this chart, we can see the channel and how we are threatening to close below it for the first time since its inception 3mos ago. Combine that with low Momentum readings and the 20CCI posting lower lows and we have a bearish reading via the oscillators to further support this view. With that being said, where are the downside targets?
With entries around the 20EMA or channel bottom, the tricky part of this move is we have the 140 handle just below current price action around 141.75. The next downside target would be the 38.2%Fib around the low 139’s but the next fib is just above 135 offering some strong downside play. The 61.8%fib offers a much longer target just above 131 for approximately 1200 pips of reward while placing stops above the 20EMA currently residing at 144.15 giving us approximately 200-300 pips risk and 1200 reward. Our favorite entry (if the oscillators continue to decline) would be where the channel bottom and 20EMA could meet which is about another 150pips above further tightening the risk.
Chris Capre is the Founder of Second Skies LLC which specializes in Trading Systems, Private Mentoring and Advisory services. He has worked for one of the largest retail brokers in the FX market (FXCM) and is now the Fund Manager for White Knight Investments (www.whiteknightfxi.com/index.html). For more information about his services or his company, visit www.2ndskies.com.