Tactically Bearish EUR/JPY on Pullback from 2-Year Highs

Point to Establish Short Exposure: Breakdown & Close below 132.05 (Dec. 15 low)

Spot: 133.17

Initial Target/Point to bring stop to break even:131.15 (November low)

Swing Target (If not holding trade 🙂 128 (Aug. low & 38.2% retracement of April-Jan. range)

Invalidation Level: 134.5 (Jan.10 high)

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Bond market volatility and record-long EUR exposure from non-commercial institutions (i.e. hedge funds) in the futures market as of January 02, 2018 may be opening up a tactical short-term downside-focused EUR/JPY trade.

After a surprise notification from the Bank of Japan that they were reducing ultra-long holdings caused a quick liquidation in EUR/JPY that saw the third straight daily decline and a drop of 1%.

Hedge Funds May Unwind Record EUR-long Futures Positions as JPY Strengthens

A recent analyst pick by Jeremy Wagner, CEWA-M on short USD/JPY ahead of a 1%+ drop and the falling velocity of EUR/USD brings this trade into view. EUR/USD could see a move to or through 1.16 after flirting but not making much progress on sustaining a break above 1.21.

It’s likely too soon to call a top in EUR this early in the year, though EUR did bottom at nearly the same time last year, but a break down and close below the pivot of 1.1850, where price would align with the uptrend from April would open up a breakdown toward the 100% bearish extension from September to the recent high down at 1.1550.

Technical Outlook Favors Downside Continuation Below 132 (Ichimoku Cloud base)

USD/JPY trading down to 111 or 109.90 would likely see a similar strong move lower in EUR/JPY with JPY strength and an unwind of EUR longs. As a tactical position, I would not be comfortable holding exposure above 135.27/51 (Jan. 3 high.)

A clean downside target on EUR/JPY would look to prior support at 131.75/50, which acted as clean support before the break toward 137 that stopped at 136.65 before slipping from two-year highs. If the rally is rolling over more considerably, traders should watch for a move down below the November low of 131.15 and to the August low of 128.

While these levels may seem aggressive, traders should note the record long CFTC Euro FX Speculative positioning that could unwind and act as a catalyst for EUR weakness emerging, even if tactically short lived and aligning with a short pop in the Japanese Yen.

The trade would be invalidated on a break and close above the January 10 high of 134.50.

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EUR/JPY chart with trendline and Ichimoku support near 132

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Chart created by Tyler Yell, CMT

EURJPY Sentiment Shows Short Positions Rise as Price Jumps

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We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURJPY 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 EURJPY price trend may soon reverse lower despite the fact traders remain net-short.

Written by Tyler Yell, CMT

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