GBPJPY: a Bullish Bat Feeding of pmi´s
This pair lost more than 200 pips last Friday, following the release of a disappointing UK manufacturing pmi. This leading indicator of economic health unexpectedly dropped to a three month low of 52.5, while experts had expected an increase to 53.7. When later the same day the US manufacturing pmi came out and was unfavourable, the Yen found relative strength, creating even more selling pressure for this pair.
On the technical side, we can now see the contour of a potential Bat pattern taking shape on the 4H chart. Price already declined severely towards the potential reversal zone (PRZ) and has passed the B point. When defining the PRZ for a Bat pattern, we look at the projection of three harmonic levels. I: the 886 retracement of XA, II: an extended AB = CD pattern (in this case 1618 AB = CD) and III: the BC expansion (in this case 2000 BC).
It is common for these harmonic levels to converge closely, defining a precise range. In this case, the three numbers define a clear zone of harmonic support, represented by the orange lines in the chart. If this pair follows “the script”, price action (PA) will test all these levels, before stabilizing and reversing. The UK construction pmi, coming out on Monday, might give this Bat a final push towards completion.
In that case, once we see PA reverse convincingly in the PRZ, we will enter the trade, as sharp reversals provide a clear direction for future price action. SL goes 10 pips behind the next relevant support level. TP1 = 382 retracement of AD and TP2 = 618 retracement of AD. The reward – risk ratio of this trade is 3.3.
POST-MORTEM: This trade idea has now been invalidated. Although the price dropped fast leading up to the completion of this pattern, it stood its ground as a valid trade candidate for a while. The clear stabilization once all harmonic levels of the PRZ had been tested, as witnessed by the spinning top smack on the outer limit of the zone, a strongly oversold RSI and the subsequent bullish candle that formed, seemed like a signal of a valid reversal in the works. It seemed. However, the yen strengthened a lot due to a strong drop in oil price yesterday, which led to declines in stocks around the world, which in turn increased the demand for the Yen as a safe haven currency. The selling pressure on this pair resulting from that made sure the reversal never really kicked in. On to the next trade!
On the technical side, we can now see the contour of a potential Bat pattern taking shape on the 4H chart. Price already declined severely towards the potential reversal zone (PRZ) and has passed the B point. When defining the PRZ for a Bat pattern, we look at the projection of three harmonic levels. I: the 886 retracement of XA, II: an extended AB = CD pattern (in this case 1618 AB = CD) and III: the BC expansion (in this case 2000 BC).
It is common for these harmonic levels to converge closely, defining a precise range. In this case, the three numbers define a clear zone of harmonic support, represented by the orange lines in the chart. If this pair follows “the script”, price action (PA) will test all these levels, before stabilizing and reversing. The UK construction pmi, coming out on Monday, might give this Bat a final push towards completion.
In that case, once we see PA reverse convincingly in the PRZ, we will enter the trade, as sharp reversals provide a clear direction for future price action. SL goes 10 pips behind the next relevant support level. TP1 = 382 retracement of AD and TP2 = 618 retracement of AD. The reward – risk ratio of this trade is 3.3.
POST-MORTEM: This trade idea has now been invalidated. Although the price dropped fast leading up to the completion of this pattern, it stood its ground as a valid trade candidate for a while. The clear stabilization once all harmonic levels of the PRZ had been tested, as witnessed by the spinning top smack on the outer limit of the zone, a strongly oversold RSI and the subsequent bullish candle that formed, seemed like a signal of a valid reversal in the works. It seemed. However, the yen strengthened a lot due to a strong drop in oil price yesterday, which led to declines in stocks around the world, which in turn increased the demand for the Yen as a safe haven currency. The selling pressure on this pair resulting from that made sure the reversal never really kicked in. On to the next trade!
You don´t need to be a weatherman to know which way the wind blows - B. Dylan
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