Pulling back within persistent short-term downtrend

• EUR/JPY is pulling back within a month-long downtrend. 
• Despite some bullish signs the short-term trend remains bearish.

EUR/JPY is pulling back after making a lower low on its persistent journey south.

Since the August 16 high the pair has steadily declined, tracing out a sequence of falling peaks and troughs which indicates EUR/JPY has established a short-term downtrend. According to technical analysis theory this favors more downside because “the trend is your friend”. 

EUR/JPY 4-hour Chart 

The last few periods, however, have formed a Japanese Hammer candlestick reversal pattern (shaded rectangle on chart). This Hammer was followed by a confirmatory green bullish candlestick. The current period is also strongly bullish – so far although it has not finished. 

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

The correction lacks upside so far, however, which means there is not enough evidence from price action to indicate EUR/JPY has reversed its short-term downtrend. 

It is showing bullish warning signs though, and if price can close above 157.49 it will suggest the short-term trend has reversed and the odds favor more upside. 

Alternatively the pull back could soon run out of steam, allowing price to resume its downtrending bias. A break below 155.15 (September 16 low) would provide confirmation of a continuation of the bear trend to the next target at 154.44 – the August 5 low. 

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