Short selling EUR/JPY

Selling EUR/JPY on strength to 159.60/70 recent highs

EUR/JPY has recovered from an early week sell-off down to the 155.00 area, and is currently sitting just below key trendline resistance from the highs at 169.15, which comes in at 158.90-159.00. Just beyond that trendline resistance are the highest highs since the massive August sell-off at 159.60/70, and beyond that is the psychologically significant 160.00 level. Daily momentum studies are positive and still pointed higher, but 4-hour and hourly studies are in overbought territory and are showing bearish divergences, suggesting the upmove is now over-extended.

The strategy is to use current strength to establish a 50% short position at 158.70 and to sell the remaining 50% of the short position at 159.50, just short of the recent highs in case they're not reached, for an average short rate of 159.10. The stop loss is above the key round-number level of 160.00 at 160.20, for a total risk of 110 pips. The profit objectives are 50% at 157.25, which is support from broken hourly trendline resistance, and the remaining 50% is at 155.50, above the hourly lows seen at the start of this week.

This strategy is heavily dependent on market volatility returning in the near future, as continued calm (equity) markets support the case for carry trades being re-entered. Conservative traders might then want to wait for further technical confirmation, which would come with a drop below the hourly trendline that has guided EUR/JPY higher since the beginning of this week, which is currently at 158.30/40 and rising. Looking at US equity market charts, I see a bearish Harami Cross in the DJIA, which is a bearish reversal candlestick pattern after an upmove. If the pattern plays out, it suggests stock markets have stalled at the pre-NFP level and are unable to extend gains further, raising the of downside potential ahead. The likely catalysts for such a move are data (such as steady initial jobless claims on Thursday or stronger than expected US retail sales on Friday) that would reduce the amount or potential for a Fed rate cut next week.