Hello Forex Traders,
I am an advocate of trading with the trend, as many of you know. Keeping one’s mindset focused on with the trend trade setups is already a job well done because our minds do have the tendency to see and spot reversal setups way too soon. Or at least, that is my impression.
In some cases though, the clear reversal signals are overwhelming and certainly very legitimate. The GBPAUD is an example that has those signals. Please read part 1 here and part 2 here. The EURUSD and GBPUSD had plenty of good reasons to reverse at 1.36 and 1.61/1.62 for more downside, despite the uptrend, as clearly stated in our Forex trading room beforehand. In fact, it would be a very wise idea to print out the EURUSD chart and memorize it by heart. That is the ideal reversal scenario.
Anyhow, the EURJPY might have something similar going on! I am in a “reversal mode” this week anyhow so I might as well continue! 🙂 Let us take a look at the EURJPY.
I will build a case study and present to you the primary reasons why a reversal could be expected.
1) Waves: first of all, I am going to throw some annoying wave analysis at you. But I only do so if I really, really need to. In this case, the chances are decent that the EJ finished wave 5 of wave 5.
2) Divergence: there is divergence between the daily tops. Double divergence in fact. Daily double divergence is a strong reversal sign and definitely not something to take light heartedly. Even if the uptrend continues, bulls need to be aware and cautious of this fact.
3) Chart pattern: when connecting a trend line over the tops (purple) and connecting the bottoms (bottom blue line), there is a potential rising wedge pattern to be seen. Rising wedges are potential reversal signals.
These are strong reversal signals… and reversals traders must be getting very interested in this setup. However, with the trend traders are in fact still seeing an uptrend. They should be cautious though about trading longs due to those reversal signals and make sure they have realistic take profit expectations (targeting below resistance).
Why is the EJ still in an uptrend?
1) When looking at the daily chart an uptrend channel (blue) is clearly visible and price is in fact bouncing off of that uptrend channel.
2) Also the downside was certainly not a clear impulsive move down. In fact it was very choppy.
Let us summarize the above and make a conclusion:
YES we are in an uptrend (daily/weekly);
BUT we have daily double divergence, rising wedge and 5 waves completed;
BUT the 4 hour down move is choppy.
Or in other words, even if the EJ would indeed reverse, then it could do so after the choppy downside has been corrected. Maybe the most likely path of least resistance for this currency is this:
The upside break is a trade we recommended in our Forex trading room. Our target though is 132.60 and you can clearly see that this is a modest target which books a 2:1 but closes out before the next resistance. That is the type of trading which gives you good % and good r:r.
The confirmation of the reversal indeed taking place is either:
a) A head and shoulders pattern or weakness when price is moving up (higher low)
b) A break of the daily up trend channel
And if the reversal does indeed materialize, then the potential targets are 128 / 125 / 120 (support levels on daily/weekly).
What do you think of the EURJPY? Let us know down below!
Make sure to check out these 2 links as well:
Wish you Good Trading!!
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