Why EUR/JPY is about to get interesting

Take a look at the 3-hourly chart of EUR/JPY below. It features Bollinger Bands overlaid. Something quickly stands out. The Bands have gotten extremely narrow in the last half day. This is after being extremely wide as the result of the crosses sharp drop from about 145.50.

The reason this is something worth noting is that narrow Bollinger Bands are generally a sign that the market is ready to do something interesting - to start a new directional move. That being the case, it becomes a question of trying to figure out which way things are going to go.

The daily chart can help a bit in that regard. As the chart below indicates, the situation in the longer time frame is a little different. The sell-off of the last few sessions has pulled EUR/JPY down to the 20-day moving average (middle line) and the Bollinger Bands are contracting. We appear to be in something of a consolidation phase. If the market holds up above about the 143.50 level, we would expect a rally back to at least test the recent highs.

How quickly such a bounce moves the market back up to 145.50 could actually be a good indication of whether there is likely to be much beyond that. A slower build could help the market consolidate enough to allow for the launch of a significant new leg higher. If we just see a jump over the course of a couple of days, though, it would be more likely that such a rally would be short-lived.

John Forman is the author of The Essentials of Trading (Wiley) and a near 20-year veteran of trading and investing across a wide array of markets and instruments. He is also Managing Director & Chief Trader for Anduril Analytics. His daily market commentary and analysis can be found in the Anduril Trading Report.