EUR/JPY has broken below key levels which strongly suggest a continuation lower – subject of course to confirmation.

The capitulation in the pair was noted by Commerzbank’s technical analyst Karen Jones in a note to clients seen by Pound Sterling Live.

In it she says that EUR/JPY’s “near-term outlook” is “negative.”

Adding, “EUR/JPY has eroded the 200-day ma at 117.82 and above the 117.50/35 2016-to-2017 uptrend. We Must assume a more negative bias and allow for losses to the 116.37 September 2016 high and potentially the 112.62 October 2016 low.”

Our own analysis also highlights the key breaks below the medium-term trendline and the 200-day moving average (MA).

These are very significant bearish signs, especially the break below the trendline.

Downside Target Calculated at 114.80

A trendline break normally leads to a follow-through move which is commonly the same length as the move immediately prior to the break.

In the case, that move is the length of ‘y’ and about 285 basis points long, and if extrapolated down, leads to a downside target at roughly 114.80.

Initially, however, there may be some ‘backing and filling’ following the break, as this is a common occurrence, and the pair could return to the trendline in a ‘throwback’ move - such a rapprochement, however, will only likely be temporary before the exchange rate moves lower again after ‘air-kissing’ the trendline ‘goodbye’.

But Bullish Signs Too…

Despite the break below the 200-day MA and the trendline, there are also some bullish signs, such as the fact the move down from the mid-March highs is a completed ‘measured-move’ where ‘x’ and ‘y’ legs are now roughly of equal length. The move is thus finished and likely to reverse and move higher.

The gap formed by the drop this morning could also be read as an exhaustion gap punctuating the end of wave ‘y’ of the measured move, and another reversal signal.

However, the seriousness of the piercing of the trendline, we believe, trumps these other signals.

A break just below the current day’s 116.88 lows – at 116.75 - would confirm a continuation lower to an initial target at 116.00 followed by 114.80.