GBPJPY – The Gap Play

Markets have spent the week so far being largely uncertain about what to do next. However, we are finally beginning to see some movement from GBP, and in particular GBPJPY. The mammoth pair is riding upwards to close the gap that has occurred over the weekend, as shown in Figure 1.

Figure 1: GBPJPY is Rising to Close the Gap

The question in traders’ minds should be what happens after the gap is closed, assuming it is closed. In many cases, there would be a consideration of two opposing factors:

1. That the gap reflected overly bearish sentiment and was a false breakout, and thus that prices are headed higher on the closing of the gap.

2. That prices are only headed higher for a brief respite, and will continue lower.

Both situations are possible, of course. However, given the severity of the implications of Brexit, it would seem reasonable to assume that the probability of price going lower is higher than of it rising. More importantly, pullback trades tend to be better in reward-to-risk profile than breakout trades.
Thus, bold traders may well be willing to take on a short once the gap is closed.

The levels of interest are illustrated in Figure 2. The Blue Box shows where there is a confluence of technical levels and factors, which may well turn lower. Once price touches this Box, signs of reversal in the form of candlestick patterns or divergence would all be acceptable potential trade triggers into a short. Traders will need to decide which triggers are appropriate for their risk appetites and trading plans, as always. Figure 2’s Blue Box is 138.42-140.16.

Figure 2: GBPJPY’s Blue Box