By John Sheridan, Trade With Precision
The Japanese Yen has been showing significant strength recently and is so far one of the top performing currencies of 2018. And that puts the Yen pairs firmly in the crosshairs of trend-following technical traders.
But while the USD/JPY has been getting a lot of the attention recently, I want to drill down into the GBP/JPY relationship. This is a currency cross that often demonstrates strong moves. Now that the Yen strength is coinciding with some weakness in the British Pound, this could lead to some interesting possibilities.Starting our analysis with the monthly chart (above), we see that since reaching a bottom in late 2016, GBP/JPY has been in an uptrend. However, this isn’t necessarily the most dynamic uptrend we’ve ever seen, as the moving averages (MA) have not come into the optimal geometry. So while from a technical perspective, we are still in an uptrend, there is a support/resistance level at 147.83 and price has now gone through this. This suggests that the long-term momentum may be more to the down side.On the weekly timeframe (above), it’s apparent that price has gone cleanly though the support level and we can see the momentum is to the down side, with the trend in its early stages. It’s quite common for price to come back and re-test a level once it has gone through it, before continuing in the direction of the trend. So this could represent a potential trading opportunity for us.
Moving down to the daily chart (above), we can see that things are shaping up for a potential short trade. We are in a well-defined downtrend on the daily chart, with a clear series of lower lows and lower highs. The strength of the trend is confirmed by the MA geometry, with the 10 period MA below the 20 period MA, which is in turn below the 50 period MA.
Looking at our MACD and RSI, we see that the indicators are converging with price, which confirms the bearish trend momentum. This price action, in combination with our analysis of the higher timeframes, means that this currency pair has earned a place on our watchlist.
It’s now just a matter of waiting for a valid setup to occur. With price having pulled back to the S/R level, which is right by the 10 period MA, this has the potential for a trade entry close to our S/R level. I will be looking for a small bearish reversal candle forming on the daily chart close to the S/R level and the 10/20 period MAs.
From a technical perspective, this has multiple elements stacking up in its favour, which is what I always want to see before placing a trade. In the event that price moves down without giving me a valid setup on the daily chart, I will be looking for potential entries on either the four hour or one hour charts.