EUR/JPY bears have been on a tear lower recently, but the bulls have held their ground to form a classic chart pattern. Will it breakdown soon?
Triangle Breakdown in EUR/JPY?
On the four hour chart above, we can see EUR/JPY in a strong downtrend momentum move since topping out around 127.00 back in March. But the bulls have shown their resolve in the fight by holding the 122.00 area over the past month, forming a classic descending triangle pattern in the process.
This pattern theoretically results in a downside breakdown, which could be the case as geopolitics continues to bring uncertainty to the markets (e.g., U.S.-China trade negotiations not going well, no-deal Brexit probability rises), but more importantly, I think the weak economic and sentiment updates will bring in more selling pressure to the euro soon. We just saw weak updates in the latest Euro area PMI data, and even the ECB is losing confidence in the recovery. So, I think it’s likely we’ll get even more dovish rhetoric from the ECB at their next monetary policy meeting in June, which is possibly the next big bearish event for the euro.
So, I’m looking to short EUR/JPY, but given that we are still a bit away from the ECB meeting I’m going to be a little bit cautious with my entry. I’m going to start with a nibbler position now that the the support area is breaking, as well as put a tentative short order above the market in case this support area holds and the market bounces higher. My stop will be the weekly ATR, which should give the trade enough room to breathe until the event, and my max target is the next major psychological area that would likely hold as support in the short-term. Here’s what I’m doing:
Short half position EUR/JPY at market (122.11), max stop at 123.90, max target at 120.00
Short half position EUR/JPY at 123.00, max stop at 123.90, max target at 120.00
I’ll be risking only 1.00% of my account and my potential return-on-risk is about 2:1 if both positions are triggered. I’ll look to add further to the position or adjust quickly (i.e., cancel orders, close trade, reverse trade) depending on where the market goes from here, especially if the geopolitical picture dramatically shifts in the next couple of weeks.
Stay tuned for updates and as always, remember to never risk more than 1% of a trading account on any single trade. Adjust position sizes accordingly. Create your own ideas and don’t simply follow what I do.
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