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A Tempting GBP/JPY Trade You Shouldn’t Touch

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Talking Points:

  • Strong Initial Case for the Short Side
  • 2 Good Reasons Not to Short GBP/JPY
  • A Long Set-up to Consider Instead

GBPJPY has quite a reputation in the industry for eating unwary traders alive, and it may be at it again. The daily chart has presented a seemingly valid countertrend short opportunity, as shown below.

Guest Commentary: Case for a Daily GBP/JPY Short

A_Tempting_GBPJPY_Trade_You_Shouldnt_Touch_body_GuestCommentary_KayeLee_November8A_1.png, A Tempting GBP/JPY Trade You Shouldn't Touch

Quite a few factors are present here that could prompt traders to short the market, including:

  1. A valid line of resistance provided by the downward-sloping trend line, and;
  2. A bearish engulfing pattern that practically jumps off the chart at you

And, on the weekly chart below, there is a classic bearish reversal divergence, which happens to be one of the signals that helped validate our NZDJPY trade from earlier this week.

See related: A NZD/JPY Set-up That’s the Best of the Bunch

Guest Commentary: Weekly GBP/JPY Bearish Reversal Divergence

A_Tempting_GBPJPY_Trade_You_Shouldnt_Touch_body_GuestCommentary_KayeLee_November8A_2.png, A Tempting GBP/JPY Trade You Shouldn't Touch

So why hesitate to take this trade?

The first and most obvious argument would be that it is countertrend in nature, which is clearly visible on the weekly chart. Now, some traders may argue that the reversal divergence pattern is a case for going short, and that is true, but the effect of Stochastic divergence is typically good for only, say, five to eight bars.

It could well give one more swipe to the downside, but the shallow, sideways motion is a signal that must be respected. If bears cannot push price down even with the help of divergence, then there is a good chance that the bulls might come in with a surprise move up.

Even on the daily chart, pattern traders will recognize the triangle consolidation pattern, which, although symmetrical, is biased to the upside due to the major upward move that preceded it.

The second argument against the GBPJPY short trade is that there are rising trend lines on the daily chart which are very close to the bearish engulfing formation. Even if the trade triggered and managed to push through one or two of them, it would be fighting nearly all the way. In short, there is just not much room to move.

So, despite what on the surface seems like a viable short set-up, the better bet is to trade with the trend, as is always the case. While trends break all the time, the probability of a trend trade being profitable is much better.

It’s not to say that the bearish engulfing pattern set-up won’t work, because it most certainly could, but under the circumstances, a long position would be much more preferable, and there just so happens to be one setting up!

The Preferred GBP/JPY Trade: Going Long

To identify an optimal buy zone for GBPJPY, we move down and look at price action on the four-hour chart, where a zone of support has been estimated near the rising support trend line on the daily triangle pattern occurring between 156.08 and 156.83.

The exact zone, particularly the higher value, is supported by previous bounces in that location, and is easily visible when looking at the red, horizontal level on the chart.

Guest Commentary: The GBP/JPY Trade That’s Worth Taking

A_Tempting_GBPJPY_Trade_You_Shouldnt_Touch_body_GuestCommentary_KayeLee_November8A_3.png, A Tempting GBP/JPY Trade You Shouldn't Touch

Due to the downward momentum move from yesterday (Nov. 7), a little more leeway has been given than usual. Hence, the support zone has approximately 80 pips, which is just slightly smaller than the pair’s current daily average true range (ATR) of 90 pips.

The ideal trade would be for price to head downwards, giving some kind of reversal pattern on the hourly chart, which could include a pin bar, a bullish engulfing pattern, or a bullish reversal divergence.

Given that this is a sideways price-motion chart on the daily, a lot of choppiness is to be expected within the triangle. That actually works in the favor of the long trade since it is possible to bank quite a few pips before price will even have to contend with upside resistance.

The GBPJPY’s notorious tendency to snap back and forth is a definite plus should this trade develop, as it could well turn profitable quickly. That’s assuming, of course, that it does not decide to take a bite at the stop loss first, but given the overall set-up, this is a calculated risk that’s worth taking.

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

Analys från DailyFX

EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

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Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Analys från DailyFX

Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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