Last week was pretty terrible for GBPJPY. It all started with the denial of a proper buy signal and ended with the creation of a long-term signal to go short. Luckily for technical traders, the situation here is really nice and clean in terms of price action, so that huge drop was largely anticipated.
The earthquake started last Monday when we opened with a huge bearish gap. This was not just any gap, but the one that cancelled the buy signal from the previous Friday. The breakout of the downwards trend line (black) got cancelled and a false breakout pattern was created (orange). All price action traders know that this is a pure invitation to go short. The price fell like a rock, breaking the crucial long-term horizontal support (yellow) on Wednesday. That breakout gave us a legitimate sell signal.
The pair is currently forming a pennant (blue). In theory, that is a trend continuation pattern, so it should result in a further drop. This is purely theoretical, though, as the recent downtrend has been so strong that I can’t imagine it continuing without a bigger correction. We haven’t even tested the yellow area as a resistance yet and I would imagine that this is a must. Anyway, we are not here to imagine, we are here to trade. Pennants are usually traded in the following way: the breakout to the upside gives us a buy signal and a breakout to the downside gives us a signal to sell.