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Despite a great start to the year and hitting a near 2.5yr high, subsequent price action has left a trail of clues that a top may already be in place.
It was the 1st of February that EUR/JPY broke to a new high in line with dominant momentum. But the celebrations were short-lived as bearish rangeexpansion bought it crashing back down with a vengeance just two days later. The decline from 137.49 over the next seven weeks saw EUR/JPY shed nearly 6.3% from the highs, with the first week alone accounting for a 4% drop at one point.
There has been a clear change in sentiment since the high and, that the decline also took out its prior swing low suggests a change of trend may have taken place. Yet even if this just turns out to be a deep correction against the 109.48 – 137.49 bullish run, we still see potential for losses over the near-term.
Following a rebound from the 128.93 low, a bearish hammer found resistance around a 50% Fibonacci retracement and its 20-week average. This makes the hammer a strong contender to be a lower high and, with resistance now seemingly in place, we’re seeking bearish opportunities on lower timeframes.
On the daily chart we can see that since peaking at 133.48, a bearish retracement line has been broken, retested and respected as resistance. This could also be part of a bearish wedge pattern which, if successful, suggests an initial target around the 128.93 lows.
However, to enter on the daily timeframe we’d prefer the daily trend structure to be predominantly bearish. Whilst near-term momentum is clearly bearish, it could pay to wait for a break beneath 128.93 before confirming a longer-term change of trend has taken place. But the breakout of the wedge following a strong rejection of the 133.03/48 area could allow short trades to be considered on intraday timeframes such as the hourly or four-hour timeframe.
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