You should have just clipped the 118.88 high bid to get short a half position at 2:40 p.m. EST today. We still have another half position to go at 118.98 with stops over the today's highs. Here's the game plan for tonight. If 118.50 prints, bring your stops to breakeven and try to hold anything you're short through the test, and probable bounce, at the 118.27 lows. The two wave c profit-taking targets derived from Fib ratios are 118.05 and 117.72. Tokyo is still on holiday tonight so expect the action to be slow until the Eurozone comes in for the morning.

We're also going to take a look at how to construct a Fibonacci zone in EUR/JPY. Zone trading is really the staple of my trading and analysis. A common complaint about any particular Fibonacci study is that you don't know which ratio the market will hold. Well, by identifying a tight consolidation zone of at least two ratios, you don't have to rely on any single Fib ratio. By finding two or more ratios calculated from multiple price legs intersecting within a 5-25 point zone on the chart, you are taking a larger snap shot of the buying and selling strength in the market. The three types of Fibonacci tools we use to take the market's temperature are extensions, projections, and expansions. The first will be projections. Notice EUR/JPY begins the sharp move higher at 153.80 and makes its way to 156.40 before the first major retracement. The move totaled 260 points and then retraced down to the 155.42 low before finding support to stage the next push higher. We won't be completely confident that 155.42 was in fact the bottom until we are past the old 156.40 highs, which is perfectly fine with us. The important idea here is that market movements, in the same direction, have relationships that are often based on Fibonacci ratios such as .618%, 100.00%, and 161.8%. In this case we are looking for a 100 % move, or 260 points, as derived from the previous bull run. So simply add 260 points to the 155.42 low of the move in question to arrive at our 158.02 target. There's zone level 1.

The next tool we are going to use is the extension. A Fib extension is nothing more than a retracement that travels more than 100%. The minor down move at 156.40 to 155.42 traveled 98 points. If the market moved 49 points higher after the 155.42 low, the market has retraced 50% of the 98 point move. Now, if the market moves back up to 156.40, we are at 100% retracement. The minute price moves past 100%, we have gone from retracement territory to extension territory. The extensions we use are 127.00%, 161.80%, 200.00%, and 261.80%. As shown on the chart, the distance of the move is multiplied by one of the 4 ratios and added to the 155.42 low . In this case, 98 pips multiplied by 261.8% added to 155.42 equals 157.98. Here's zone level number 2.

The last tool we'll look at tonight is the expansion. Take that same 260 point move up from 153.80 and multiply it by any of the following Fib ratios; 38.2%, 50.0%, 61.8% 100%, 161.8%, 200.00%, 261.8%. Take the product of your multiplication and add it to the top our studied price leg. In this case 260 pips multiplied by .618% equals 160.68 pips. If you add that product to the top of 156.40, you arrive at 158.0068, our third zone level. This tool is similar to the projection, except we have not taken the retracement leg from 156.40 to 155.42 into account. We are only interested in how far the 260 point leg â�,��"expandsâ�,� through the 156.40 highs based on a Fib relationship.

So our Fib zone consists of Fibonacci resistance from three different price legs at 158.02, 158.00, and 157. 98. Add parallel channel resistance to it and we have a pretty strong inclination that the advance could at least pause here. Let's not forget that EUR/JPY is on a runaway train here, so the plan is not to get short. We are only using EUR/JPY as a proxy to our USD/JPY short idea for tonight. The concepts we looked at tonight are more effectively employed when trading with the overall trend. Meaning, a Fib support zone is identified during the course of an uptrend, and a Fib resistance zone during the course of downtrend, such as we have on the intra-day USD/JPY chart.

Todd Gordon is a Technical Currency Strategist and Fund Trader with GAIN Capital Group.

Disclaimer
The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.