In the past few weeks, the EUR-JPY became one of, if not the most dynamic currency pair among the majors. Combination of strength in the Euro and weakness of the Yen created huge moves here. Last week in particular was very eventful, with the price advancing to as high as 119.33, with the range for the period of almost 600 pips. Some of it had to do with the new JPY 10.3 trillion stimulus package in Japan, unveiled on Friday. While slightly smaller than expected (12 trillion), it was enough to push this pair to new highs for the move. The question is, can this rally continue unabated, or is a large correction inevitable? Charts of all time frames are bullish, but some of them are becoming overbought.
The weekly chart is unmistakably bullish. Here the EUR-JPY is above all key resistance levels – the 100 SMA, the Ichimoku Cloud and the previous high of 111.42. That last aspect is very important, because clearing that obstacle officially reversed the long-term downtrend. The next resistance and the objective for the new uptrend is at the 123.00 handle. However, following a successful breakout markets often have tendencies to pull back to that level. For now, the weekly chart does not show signs of correction, suggesting that 123.00 could be reached before a substantial pullback sets in.
The daily chart of the EUR-JPY also shows a strong bull market. Here we can see increased volatility, with the ATR rising to levels not seen since 2011. Last two days show the largest price range in months, with new highs by a significant margin. At the same time, this acceleration may be suggesting overbought market conditions, as the price is assuming parabolic qualities. This pace is rarely sustainable and often results in a strong and fast corrective move. In this case, it could easily be 111.40 or so, where the main bullish breakout took place. That said, we still do not a have confirmation of this move becoming exhausted. For that, the EUR-JPY must form a decisively bearish candlestick reversal pattern, so for now the daily chart remains bullish.
Things become even more interesting on the intermediate-term chart. Here the uptrend is clearly advanced, in terms of both appreciation and duration. There are at least three consolidation areas, or flat bases. It is not often that trends last much longer after this development, and the extension last week could easily be the blow out top. Still, just like the daily chart, the 4H graph also does not show signs or reversal yet, only a trend in its late stage (probably).
Moving to an even shorter time period, the 1H chart is decisively overbought. It developed a divergence with the MACD indicator, often a sign of weakness ahead. Not necessarily a major reversal, but at least a correction. Because the EUR-JPY closed near its daily high for Friday, I will look for a bearish reversal candlestick here, which would serve as a short entry, seeking 50-60 pips. In the perfect world, that pattern should form at a new high, although that is not absolutely critical. On balance, while still bullish, this chart is showing more signs of potential correction then its larger counterparts.
The volatility here is so high, that even smaller magnitude charts show large price movements and are worth following. There is no guarantee the volatility will remain elevated after the weekend, but it is, the 15M chart could offer additional trading opportunities. Currently, for those seeking trades on the short side, like me, a move below the latest low of 117.16 (A) would indicate reversal. If the EUR-JPY makes new high, the next likely entry point will be at 118.55 (B). Similar situations exist in most other JPY pairs. As always after the weekend, I will also look for gaps in all currencies, as they often present good opportunities. Have a great trading week!
Mike K.