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Technical analysis of euro-yen shows pair heading for 120

An image of Euro banknotes being counted.
Leonhard Foeger | Reuters
An image of Euro banknotes being counted.

The euro-yen pair looks set to continue its steady downtrend, with only a small likelihood of a rally and a longer-term target near 120.

The pair is using the long-term downtrend line as a support level. Rally rebounds face well-established resistance levels created by a legacy of trading bands.

The euro-yen moves between these trading bands, using them alternatively as support and resistance levels; the 127 level is a key support level and is now acting as a resistance level, which the pair is currently testing.

A breakout above the 127 level is a low probability, but if it does develop, then the upside target is near 132.

More likely, however, is a retreat from near 127 and a retest of the downtrend line as a support level, with long-term support near 120.

We'll use the ANTSSYS trade and analysis method to identify opportunities as the market retreats from near 127. This is traded with a tight stop using a customised ATR indicator.

The price peaked in December 2013, then again in December 2014 and June 2015 to create a head-and-shoulder pattern. If this pattern is valid, it would give a downside projection target near 110.

But we don't see this as a valid head-and-shoulder pattern because the pattern development is interrupted to too many subsidiary highs.

Additionally, it's not normal for the development of these patterns to be spread over three years; a 4-8 month period is more typical.

So traders and investors should watch carefully for trend reversal patterns to develop as the euro-yen rebounds from support near 120.

Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders, available from www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box and a speaker at trading conferences in China, Asia, Australia and Europe.