In recent days USD/JPY was trading in a narrow range around two important Fibonacci retracements. Earlier today, currency bears approached the pair to the lower border of the consolidation. Will we see breakdown in the coming days?

In our opinion the following forex trading positions are justified - summary:

• EUR/USD: short (a stop-loss order at 1.2250; the initial downside target at 1.1510)
• GBP/USD: short (a stop-loss order at 1.3773; the next downside target at 1.3000)
• USD/JPY: none
• USD/CAD: none
• USD/CHF: none
• AUD/USD: none

EUR/USD

On the daily chart, we see that EUR/USD extended gains earlier today, which means that what we wrote yesterday remains up-to-date:

(…) taking into account Friday drop to the green horizontal support line (based on the mid-August low) and the buy signals generated by the daily indicators, it seems that we may see a short-lived rebound (even to the last week highs) in the coming days.

Will such price action change anything? In our opinion, it’s doubtful, because as long as the exchange rate remains under the neck line of the head and shoulders formation (the blue resistance line), this bearish pattern is underway, suggesting lower values of EUR/USD.

The pro bearish scenario is also reinforced by the long-term picture of the exchange rate.

As you see on the above chart, EUR/USD is trading under the orange resistance zone, which together with the sell signals generated by the indicators suggests that lower values of EUR/USD are still ahead of us (even if we see a short-term rebound).

Very short-term outlook: mixed with bearish bias
Short-term outlook: bearish
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): Short profitable positions (with a stop-loss order at 1.2250 and the initial downside target at 1.1510) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

GBP/USD

A week ago, we wrote the following:

(…) we think that if the pair extends losses from current levels, we’ll see a test of the mid-September low of 1.3149 and the 61.8% Fibonacci retracement based on the August-September upward move (around 1.3115) in the coming days.

From today’s point of view, we see that the situation developed in line with the above scenario and GBP/USD not only tested our downside target, but also slipped below it, reaching the 70.7% Fibonacci retracement. As you see, this support level encouraged currency bulls to act, which resulted in a rebound in recent days.

Did this increase change the short-term outlook? In our opinion it didn’t, because the size of the move is quite small – the exchange rate climbed slightly above the 23.6% Fibonacci retracement based on the entire September-October downward move.

Nevertheless, taking into account only the buy signals generated by the daily indicators (the sell signals generated by the weekly indicators continue to support currency bears), it seems that GBP/USD could extend gains and even verify the earlier breakdown under the August peak. At this point it is worth noting that in this area is also the 38.2% Fibonacci retracement (based on the entire recent downward move) and the yellow resistance line, which together will likely stop further improvement and trigger a decline to our next downside targets – the lower border of the brown rising trend channel marked on the daily chart and the support zone created by the 76.4% and 78.6% retracements (around 1.3000) in the following days.

Finishing today’s commentary on this currency pair, please keep in mind what we wrote about the situation in the long term:

(…) this month’s decline took the exchange rate below the previously-broken red line (the neck line of the very long-term head and shoulders formation), which resulted in an invalidation of the earlier breakout.

Additionally, the Stochastic Oscillator generated the sell signal (while the CCI is very close to doing the same) for the first time since July 2014, which suggests further deterioration in the coming month(s). Why? When we take a closer look at the long-term chart, we see that similar readings of the indicators preceded a significant decline in the following months, which suggests that we’ll see a similar price action later in 2017. Therefore, short profitable positions continue to be justified from the risk/reward perspective.

Very short-term outlook: mixed
Short-term outlook: bearish
MT outlook: mixed with bearish bias
LT outlook: mixed with bearish bias

Trading position (short-term; our opinion): Short profitable positions (with a stop-loss order at 1.3773 and the next downside target at 1.3000) are justified from the risk/reward perspective. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

USD/JPY

Looking at the daily chart, we see that although USD/JPY broke above the upper border of the blue consolidation at the end of the previous week, this improvement was very temporary and the exchange rate invalidated this move very quickly. Earlier today, the pair verified the breakdown under the resistance area created by the 76.4% and 78.6% Fibonacci retracements, which encouraged currency bears to act. As a result, USD/JPY extended losses and approached the lower border of the blue consolidation.

What’s next? Taking into account the sell signals generated by the indicators, it seems that further deterioration is very likely. However, in our opinion, it will be more likely and reliable if USD/JPY closes today’s session (or one of the following) below the lower line of the formation. If we see such price action, currency bears will likely test late September lows (around 11.48) or even push the pair to around 111.10-111.20, where the size of the downward move will correspond to the height of the consolidation and where the 38.2% Fibonacci retracement (based on the entire September-October upward move) and green support zone created by the August peaks are.

Very short-term outlook: mixed with bearish bias
Short-term outlook: mixed
MT outlook: mixed
LT outlook: mixed

Trading position (short-term; our opinion): No positions are justified from the risk/reward perspective at the moment. We will keep you informed should anything change, or should we see a confirmation/invalidation of the above.

Thank you.

Nadia Simmons
Forex & Oil Trading Strategist
Przemyslaw Radomski, CFA
Founder, Editor-in-chief, Gold & Silver Fund Manager

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