EUR/JPY: Chance to Reshort for New Lows

05/12/2009 12:01 am EST

Focus: FOREX

EUR/JPY has bounced sharply from the April 28th spike low at 124.40, however, the five-wave decline from the April 6th high at 137.40 (see numbering on daily chart below) suggests that these recent gains are a correction, and with an eventual resumption of the declines back to the 124.40 low and even below after. Currently, the market is chopping from its recent high at 132.85, potentially completing an important top and suggesting a resumption of the bigger picture declines ahead. For now, I want to be short and would resell here (currently at 131.25). However, the confidence that a top of that magnitude is not yet extremely high, so use an aggressive stop on a close above the month-long bearish trend line (currently at 132.70/85) to compensate (lower risk offsets the somewhat lower confidence).

Note that even a break above there would not change the bigger picture view of eventual declines below 124.40, and I would be looking to resell at higher levels if taken out. Further resistance above there is seen at 134.20/35, while support before the 124.40 low is seen at 129.75/90 (earlier spike low) and 128.60/75 (50% retracement from the 124.40 low). Unfortunately, many missed the buy area from the April 28th email at 125.70 (for the countertrend bounce).

Longer term, no change as the market is seen as likely completing an “irregular” correction from the October low at 113.65 at the early April high at 137.40. This suggests potential for further declines all the way back to the January low at 112.10 and even temporarily below (see “ideal” scenario in red on weekly chart below), and also fits the longer-term view for USD/JPY (potential for temporary declines below the December/January double bottom at 87.15). So for now, we will switch the longer-term bias to the bearish side, but will be looking for signs of a more important bottoming on an approach of the January 112.10 low and especially on a slight break.

By David Solin of Foreign Exchange Analytics

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