We warned yesterday about the confluence of events and technicals underway in EUR/JPY and said a big move was likely today. The direction wasn’t entirely clear because there was a possibility of a false breakout but we said the bias was to the upside.

We wish we would have ignored the possibility of a false breakout and went long because there was a huge move to the upside today in EUR/JPY. The combination of an inverse head-and-shoulders pattern and the end of the month/quarter/Japanase fiscal year generated a big move in the pair.

Here is the chart. Note how today’s move was the biggest in more than a month.

The good news is, as our strategy pointed out yesterday, that this is just the beginning of a bigger move. The head-and-shoulders pattern is now confirmed. The measured target is 130.77.

We think there might be some pain, in terms of a pullback, but we also can’t rule out a continued rally. We are going long here and are going to look for ways to add to our position. We will be adding all the way down to 125, if necessary.

The euro appeared to break higher against the yen early in Tuesday trading but it was forced back by worries about sovereign debt in Greece and Ireland. The mid-day rally above resistance followed by a reversal set-up a bearish daily signal that could potentially be a false breakout. It could also be a real break out. Either way, expect a big move in EUR/JPY in the coming day(s).

Notice how the pair rises above resistance on the last candlestick but then closes lower in a gravestone doji that could evolve into an evening star. As we have mentioned here many times in the past, we love to look for doji stars at points like this because volatility usually follows.

What makes us extra excited about the coming day or days of trading is that Wednesday is the final trading day of the month, quarter and Japanese fiscal year. Thursday will be the first day of a new month, new quarter and new Japanese fiscal year.

When the technicals and the calendar both point to high volatility we get excited and ready to trade.

So which way is the market going to go? We don’t have a position at the moment but we believe there is a big move coming and once we get some confirmation about the direction, we will be riding it for many pips.

A rally to the upside would create a classic inverted head-and-shoulders pattern — a text book formation. The target would be 130, or the 200-day moving average. We would look for a rally above 126 as confirmation of the up move.

A rejection of the resistance line and confirmation of the false breakout would come witha fall below 124. Our initial target on this move is 122 and potentially 120.

Our bias is to the upside be we are going to wait for the technicals to align.

If we could have only one chart to look at every day, it would be EUR/JPY. Last week was a wild week for the pair that culminated in Friday’s break of the 50, 100 and 200-day moving averages. It’s rare to see all three give way in the same session and a strong sign of strength even if the moving averages haven’t been particularily relevant in this pair in the past.

So why do we love EUR/JPY? It’s the cross that tells you so much about the overall sentiment of markets. It tracks risk well and is excellent at avoiding some of the flows that distort the U.S. dollar.

It’s also a very technical pair. Taking a look at the daily chart over the past few months shows a clear triple-top and a double bottom.

We wrote about the triple top a few weeks back and said it was a sure sign of coming weakness. In the same way, the technical bottom was a beautiful reversal but it happened so fast and markets were so fluid that we didn’t have a chance to trade it.

We wish we did. Some of the best opportunities come in fast markets when you’re able to keep a close eye on the bigger picture. Anywhere around 127 was a clear buying opportunity and the rebound above 129.50 confirmed it. Even momentum players had plenty of time to get in and pick up 300 pips.

Now it’s clear that we have a range trade set up. There has been consolidation in this area in the past and we would expect continued choppy trading but the bias is higher and for a retest of 137. We will be looking for opportunities there and will be extra-ready to sell if we see anything in the 138 range.

A failed attempt to break 138.50 established a long-term triple-top on EUR/JPY charts and has led to a substantial 300 pip pullback. This chart has been a easy one to trade for technical traders and given the historical volatility of the pair around tops, this move may still have some way to go.

Looking at the hourly chart, a pattern of sharp drops and retracements is evident. After the initial drop, there is a nearly perfect 38.2% Fibonacci retracement. The second leg down was followed by a nearly 50% bounce and third leg by only a 22% rebound. In the most-recent leg, we have already seen a 38.2% retracement.

If that correction can exceed 50% (135.61) then the hourly downtrend may be in jeopardy. In that case, look for some stronger consolidation around 136.22 – 136.33 as another cue to sell. If then downtrend continues, look to support at 134.87.