Libra Esterlina/Iene JaponêsAtualizado Call me crazy, but GBP/JPY may be finished falling
Okay, so this one isn't so much a trade idea/signal, but more of a "this is interesting, let's watch and see" analysis.
GBP has been falling for a long time now. It depends on your time frame and how far you want to go back, but definitely for the last few years. However, something interesting has been happening over the last few weeks (barring the Boris Johnson... factor).
GBP/USD is sitting at 2017 lows, and GBP/NZD is potentially forming a bottom (although that's more to do with the NZD weakness/interest rate decisions than GBP strength). But the one I want to look at today is GBP/JPY...
GBP/JPY (GJ) has been falling steadily since March 2019 (and before that since February 2018), but after trying to form a low at the end of July, the market fell off a cliff and dropped 500 pips in little more than a week. Normally that's a huge sign of weakness, and it may very well be. But if we look at the fact that GJ is sitting at a support/resistance zone (formed by my algo - see Related Ideas), there's a potential momentum divergence forming, and we have a huge spike in volume... things may be about to change.
So let's address the volume elephant in the room. Volume in forex markets isn't like standard volume because there's no centralized exchange. So when we add the volume indicator to a currency pair, we're actually looking at tick volume (basically measuring how often the price moves - or ticks - up and down). So on a high "tick volume" day, price is zig zagging crazily up and down on it's way to wherever it ends up. And vice versa for a low tick volume day.
While tick volume and traditional volume are different beasts, they're both measuring the same thing: activity levels in the market. Why is this important? Because you need large level activity and interest to move the market in big, sustainable, ways. It can also give us some interesting signals, because for there to be high tick volume price has to move up AND down. In a falling market this means that despite price falling, there was an increased level of buying that we previously haven't seen. Accumulation anyone? If you're interested, look at the increased tick volume in February 2018 - classic distribution.
So if we look at our chart, something immediately jumps out: average tick volume activity (measured by a 20 period Moving Average), is at its highest level since the February 2018 high. Which we can now see was the beginning of the current 1.5 year (and 2500 pip) downtrend. The second last time it was at this level was the 2016 low - which led to a 2500 pip rise, and the subsequent 2018 high. See here:
Now, I'm not suggesting that GJ is 100% definitely going to rise. What I am suggesting, however, is that we have some signals presented to us by the market that MAY indicate that GJ has reached (or is near to) a bottom. In this light, we could view the recent 500 pip fall as the final pain point at which any remaining buyers were squeezed from the market. Which therefore could lead the huge level of tick volume (and therefore buying/selling in the market) to suggest that institutional money has entered the market and is busy building positions to send GJ in the opposite direction.
In sum, I wouldn't be shorting GJ at this point in time. The market is sending us some clear signals, and until we see otherwise (e.g. a strong break of the S/R zone) I'm steering clear of the GJ market. Which also means I'm not buying yet. Reversal zones tend to be hugely choppy, and I don't want to get stopped out by increased volatility.
Keep an eye on GJ, and the GBP in general. Maybe the big money knows something we don't, or GBP has simply fallen as far as it can for now. It may consolidate into a sideways pattern until Brexit is resolved, or there could be an upcoming news/economic event that sends GBP in the opposite direction. Until the market gives a clear signal which side is winning, we should be sitting on the sidelines.
All the best.
DD
GBP has been falling for a long time now. It depends on your time frame and how far you want to go back, but definitely for the last few years. However, something interesting has been happening over the last few weeks (barring the Boris Johnson... factor).
GBP/USD is sitting at 2017 lows, and GBP/NZD is potentially forming a bottom (although that's more to do with the NZD weakness/interest rate decisions than GBP strength). But the one I want to look at today is GBP/JPY...
GBP/JPY (GJ) has been falling steadily since March 2019 (and before that since February 2018), but after trying to form a low at the end of July, the market fell off a cliff and dropped 500 pips in little more than a week. Normally that's a huge sign of weakness, and it may very well be. But if we look at the fact that GJ is sitting at a support/resistance zone (formed by my algo - see Related Ideas), there's a potential momentum divergence forming, and we have a huge spike in volume... things may be about to change.
So let's address the volume elephant in the room. Volume in forex markets isn't like standard volume because there's no centralized exchange. So when we add the volume indicator to a currency pair, we're actually looking at tick volume (basically measuring how often the price moves - or ticks - up and down). So on a high "tick volume" day, price is zig zagging crazily up and down on it's way to wherever it ends up. And vice versa for a low tick volume day.
While tick volume and traditional volume are different beasts, they're both measuring the same thing: activity levels in the market. Why is this important? Because you need large level activity and interest to move the market in big, sustainable, ways. It can also give us some interesting signals, because for there to be high tick volume price has to move up AND down. In a falling market this means that despite price falling, there was an increased level of buying that we previously haven't seen. Accumulation anyone? If you're interested, look at the increased tick volume in February 2018 - classic distribution.
So if we look at our chart, something immediately jumps out: average tick volume activity (measured by a 20 period Moving Average), is at its highest level since the February 2018 high. Which we can now see was the beginning of the current 1.5 year (and 2500 pip) downtrend. The second last time it was at this level was the 2016 low - which led to a 2500 pip rise, and the subsequent 2018 high. See here:
Now, I'm not suggesting that GJ is 100% definitely going to rise. What I am suggesting, however, is that we have some signals presented to us by the market that MAY indicate that GJ has reached (or is near to) a bottom. In this light, we could view the recent 500 pip fall as the final pain point at which any remaining buyers were squeezed from the market. Which therefore could lead the huge level of tick volume (and therefore buying/selling in the market) to suggest that institutional money has entered the market and is busy building positions to send GJ in the opposite direction.
In sum, I wouldn't be shorting GJ at this point in time. The market is sending us some clear signals, and until we see otherwise (e.g. a strong break of the S/R zone) I'm steering clear of the GJ market. Which also means I'm not buying yet. Reversal zones tend to be hugely choppy, and I don't want to get stopped out by increased volatility.
Keep an eye on GJ, and the GBP in general. Maybe the big money knows something we don't, or GBP has simply fallen as far as it can for now. It may consolidate into a sideways pattern until Brexit is resolved, or there could be an upcoming news/economic event that sends GBP in the opposite direction. Until the market gives a clear signal which side is winning, we should be sitting on the sidelines.
All the best.
DD
Nota
Well, turns out I wasn't crazy - always nice to know. GBP/JPY is currently up over 400 pips from the initial post. Targeting 131.50 and then 132.40.This is potentially a long-term reversal. But we'll need to see how that plays out over the coming weeks.
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