This popular pair
has just given us a very strong indication that the bearish trend on the Weekly Chart is likely to continue into the first few weeks of 2012. After a brief period of
consolidation that led to the formation of a Pennant on the Daily Chart, a
breakout signal has now been given to signal lucrative bearish moves in the days
ahead for traders. Within the next few days, the pair is likely to hit an opposing downtrend line at 119.00 before breaking below to head to the weekly forecast target of 116.48. This target is likely to be reached within the next 7 to 10 days and coincides with the average weekly range of 500 pips as well as the major Support point for the Weekly Chart.
Since a strengthening of the Japanese Yen has been associated with increased risk-aversion in the financial markets, the resumption of this downtrend is likely to be accompanied by more negative news regarding the world economic outlook. We could therefore see a deteriorating situation in Europe regarding the Debt Crisis and its negative effect on the financial system and global production in the real sector. Nevertheless, the opposing `risk` factor to further gains for the JPY may come from intervention by the Bank of Japan to protect the country´s export sector. Therefore, although the technical aspects of this currency pair point strongly to further bearish moves, opposing headwinds from a vigilant central bank could temporarily limit gains for the Yen.
As we take a look at this important time frame, we will notice that the Pennant formation has been broken to indicate the start of another bearish move following the last one in November. While breaking lower, the first hurdle is likely to be the opposing downtrend line of the Weekly Chart around the 119.00 area which could be a short-term profit point for daily and overnight traders (100 pips). Once this trend line is broken, then the currency is likely to head steadily to the forecast target of 116,48 seen on the Weekly Chart.
When this 116,48 area is hit, we could see another brief period of sideways movement or a temporary rally before the major downtrend is resumed. Swing traders usually feel comfortable exiting at these types of technical areas and re-entering when another bearish signal appears to indicate more gains ahead for the Yen. However, longer term traders may opt to hold on to their positions for further gains given the strength of the downtrend.
The above setup for the GBP JPY is a typical example of how most currency pairs resume their major trends for the upcoming month. The key aspect of this setup is that the signal for the Daily Chart is strong and clear and is in sync with the direction of the Weekly Chart. This gives a trade a higher probability of success compared to others and provides us with the added confidence that our entry decision will be rewarded with profits in the days ahead.
In terms of targets, short-term traders will usually try to take 100 pips from this trend, while swing traders aim for between 200- 400 pips in gains. Longer term traders will head for the monthly range of close to 800-900 pips and exit with an even larger profit. As always, the profit target will depend on your monetary needs, patience and your feelings towards the impact of financial and economic news on your selected currency pair. Happy trading.