Retracement in short-term persistent downtrend

• EUR/JPY is pulling back in a one-month downtrend.
• Despite some optimistic signs, the short-term trend remains bearish.

EUR/JPY is retreating after making a low low on its persistent journey south.

Since the high on August 16, the pair has been steadily declining, tracking a sequence of declining highs and lows, indicating EUR/JPY has established a short-term downtrend. According to the theory of technical analysis, this favors more downside because “the trend is your friend.”

EUR/JPY 4-hour chart

The last few periods, however, formed a Japanese hammer candlestick reversal pattern (shaded rectangle on the chart). This hammer was followed by a bullish confirmation green candlestick. The current period is also strongly bullish – so far, though not over.

At the same time, the Relative Strength Index (RSI) moved from oversold back to neutral. This advises traders to close short positions and open long positions.

However, the correction has no upside so far, meaning there is not enough evidence from the price action to indicate EUR/JPY has reversed its short-term downtrend.

However, it gives bullish warning signs, and if the price can close above 157.49, it will suggest that the short-term trend has reversed and the odds favor more upside.

Alternatively, the pullback could be lost soon, allowing the price to resume its downtrend. A break below 155.15 (September 16 low) would provide confirmation of bearish continuation until the next target at 154.44 – the August 5 low.

A break below this would be an even more bearish sign and suggest a likely reversal of the long-term uptrend.