Back in May, we highlighted the technical evidence supporting a EURJPY bounce from the 138.00 area, concluding that,“The combination of a clear candlestick pattern, long-term MA support, and an oversold market is the textbook recipe for a short-term rally, though the downward trending MACD suggests the medium-term momentum remains with the bears” (see below for more).
The anticipated bounce emerged last week, but the rally stalled out almost exactly at previous-support-turned-resistance near the 1.40 level, and rates have shed nearly 200 pips from that barrier thus far this week. With the unit once again testing key support around 1.3800, another bounce is possible, but if that floor gives way, a tumble down to the 2014 low near 136.20 would come into play.
Tackling the fundamental backdrop first, the euro has been on the back foot throughout this week as traders continue to digest last week’s landmark ECB decision. Today’s bearish catalyst came in the form of comments from ECB member Hansson, who argued that the central bank should develop a plan for introducing quantitative easing (QE) in case its necessary. While the powerful German Bundesbank still opposes outright money printing, the other ECB members appear to support the notion, increasing the likelihood that the ECB could ease further in the months to come.
Looking to the chart, this news pushed the EURJPY to close below its 200-day moving average for the first time since November 2012. Meanwhile, the secondary indicators are also painting a bearish picture. The MACD is below the “0” level and about to cross back below its signal line, showing a shift to strongly bearish momentum. Meanwhile, despite last week’s bounce from oversold territory, the RSI remains well within bear territory (i.e. it continues to find resistance at 60).
As we noted above, the pair is testing previous support around 1.3800, but if the 78.6% Fibonacci retracement at 137.80 is broken, bears would turn their eyes toward the 2014 low at 136.20 next. On the other hand, only a rally back above key psychological resistance at 1.40 would shift the bias back to the neutral in our view.
Source: FOREX.com
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EUR/JPY: Bounce Possible off 200-Day MA, but Bias Still Bearish Below 140.00
Updated - May 22, 2014 2:30:00 PM By Matt Weller
Two weeks ago, my colleague Fawad Razaqzada presciently identified a symmetrical triangle breakdown in EUR/JPY, arguing that if 140.00 support was broken, “it is anyone’s guess how far the pair could fall.” Since then, the pair has broken below 140.00 and continued down to test the 200-day MA near 138.00. While we remain concerned with the longer-term outlook for this pair, the technical evidence suggests we could see a near-term bounce from this level.
Looking to the daily chart, the pair put in a clear Bullish Pin Candle*, or hammer, pattern yesterday. This formation shows an intraday shift from selling to buying pressure and is often seen at near-term lows in the market. At the same time, the daily RSI indicator turning higher from oversold territory for only the second time this year, suggesting that trade has been extremely one-sided over the past few weeks. The combination of a clear candlestick pattern, long-term MA support, and an oversold market is the textbook recipe for a short-term rally, though the downward trending MACD suggests the medium-term momentum remains with the bears.
If a bounce does emerge, the first major hurdle for EUR/JPY will be previous-support-turned-resistance at 140.00, which is also an important psychological/option-related level. A break above that barrier could expose bearish trend line resistfance off the December 2013 highs around 142.00. On the other hand, more weakness in the USD/JPY could take EUR/JPY down with it; a drop through 200-day MA support and the 78.6% Fibonacci retracement at 137.80, could pave the road for a continuation down to the 2014 low near 136.20 next.
*A Bullish Pin (Pinnochio) candle, also known as a hammer or paper umbrella, is formed when prices fall within the candle before buyers step in and push prices back up to close near the open. It suggests the potential for a bullish continuation if the high of the candle is broken.
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