Much like my GBP/CAD short, I’m going with another simple technical trend setup, this time on EUR/JPY. Is the recent bounce higher an opportunity play the longer-term move lower?
Since mid-September, EUR/JPY has been on a steady trend lower before finding a bottom last week around 135.00. Buyers have pushed the pair higher this week as risk aversion sentiment eases, as well as strong bearish sentiment against the Japanese yen. I think this may be a good opportunity to short some euros ahead of what could be a bearish weekend for Europe; we’ll get the final results of the ECB’s bank stress test on Sunday at 11:00 am GMT. Because the banks have had all year to build up capital reserves, the expectation is that we’ll see few failures, which may be priced in already. So, anything beyond only a few small banks needing help may spark some Euro selling at the open of trade next week.
I don’t know what will happen this weekend, but I do know European data is weak and the price trend over the past month has been down–that’s what I’m playing after a nice bounce higher. But because of weekend event risk, I’m going with a conservative setup of scaling into a short and using a wide stop from my average entry position. My main target will be the next major support level, last tested around this time last year. Here’s what I’m doing:
Short half position EUR/JPY at market (136.90), stop at 139.70, profit target at 132.00
Short half position EUR/JPY at 138.50, stop at 139.70, profit target at 132.00
I’m only risking 1.00% of my account on this one, and with this trade structure I have a potential reward-to-risk ratio of about 2.8:1 if both positions are triggered. Of course, anything can happen in the forex markets, so if the story changes I’ll be sure to reassess and adjust quickly if necessary. Stay tuned!