The euro/yen chart has multiple features which suggest a downside target near 107. We show two of these features on this chart extract.
The dominant feature on the chart is the down-sloping trend channel. From July 2015 until June 2016, the lower edge of this trend channel acted as a support level. The line changed its polarity after the break below the lower trend line in June 2016. The line then acted as a resistance level.
On current values, this creates a resistance level near 115 for any rally. This limits the bullish behavior of the euro/yen. The strength of this downtrend line is a bearish feature.
Since June 2016, the euro/yen has been oscillating around the historical resistance level near 113. This has acted as a support level, although it has been seriously breached on several occasions. This suggests this level is a relatively weak support level. This second feature adds to the bearish outlook for the currency pair.
These are bearish features but they do not assist in setting a downside target. For this calculation, we need to use a monthly chart. The monthly chart (not shown in this chart extract) has a very long-term head and shoulder reversal pattern. The left shoulder is created by the peak near 145 in December 2013.
The head of the pattern is created near 149 in December 2014. The peak of the right shoulder is created near 141 in June 2015. This peak is shown on the weekly chart extract. The neckline is created by the low in February 2014 and the lows in March and April 2015. This is a very long-term head and shoulder pattern.
As with all head and shoulder patterns, the distance between the top of the head and the neckline drawn between the shoulders is measured. This value is then projected downwards and gives a downside target near 107. This target is validated as 107 is also a long-term support and resistance level for the euro/yen. We use the ANTSSYS trade and analysis method to identify the opportunities as the market retreats from near 113. This is traded using a customized ATR indicator as the stop.
These three features – trend channel resistance, historical resistance, and the head and shoulder target projection - combine to suggest there is a high probability the bearish trend will continue and reach a downside target near 107.
Daryl Guppy is a trader and author of Trend Trading, The 36 Strategies of the Chinese for Financial Traders –www.guppytraders.com.. He is a regular guest on CNBCAsia Squawk Box. He is a speaker at trading conferences in China, Asia, Australia and Europe.
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