USDJPY surged sharply in 2021, but has really been skyrocketing in 2022. The pair started this year from 115.11 in January. Ten months later in October, it was trading in the vicinity of 152.00. Given the Fed’s aggressive rate hikes and the BOJ’s stubbornly loose monetary policy, there was hardly any reason to expect a trend reversal soon.
Except there was, but not where most people would be looking for it. While the majority of economists and market analysts focus on external news and macroeconomic data, USDJPY ‘s had been giving us a hint on its price charts. The one below was shared with our Elliott Wave PRO subscribers on October 17th, when the pair was at 148.76 and still on its way up.
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In Elliott Wave analysis, there is a certain logic in everything. Trends begin with a motive pattern – an impulse or a leading diagonal. Anything other than that means that the move we’re witnessing is most likely part of a larger corrective sequence. On the chart above, a sharp surge occurred in the second half of 2016. However, it was limited to only three waves, labeled (w)-(x)-(y), not five as in an impulse or a diagonal.
So, we labeled that rally as wave W and thought that whatever comes next must be corrective in nature, as well. Another (w)-(x)-(y) double zigzag then slowly dragged USDJPY down to 101.18 during the Covid-19 panic of March, 2020. Since it didn’t breach the 2016 bottom of 98.99, it made sense to conclude that another three-wave rally should be expected in wave Y.
No Trend Lasts Forever, Including USDJPY ‘s
Wave Y could’ve ended anywhere above the top of wave W at 118.67. Instead of slowing down after exceeding this mark, however, the bulls only grew stronger. This didn’t change the count, though, only the proportions between the waves. So, while we couldn’t have known where was wave Y ultimately going to end, we knew that no trend lasts forever.
Wave Y was shaping up as a simple (a)-(b)-(c) zigzag. The Elliott Wave theory states that except in triangle corrections, C-waves always develop as either an impulse or an ending diagonal. Here, wave (c) was clearly not a diagonal. The only possibility was that it was going to be a giant five-wave impulse pattern. By mid-October, 2022, we’d already labeled its sub-waves as 1-2-3-4-5, where the structure of wave 3 was also visible.
This meant that once wave 5 was over, the entire 2022 uptrend would end, as well. Instead of extrapolating the recent past into the future, Elliott Wave analysis had been preparing us for a bearish reversal near the 150.00 mark. That’s exactly what happened just a few days later.
USDJPY climbed to 151.95 on October 21st, 2022. The following month and a half went entirely under the bears’ dictation. On December 2nd, the pair fell to 133.62, down over 12% from its peak. The Fed is expected to slow the pace of rate hikes going forward as inflation cools, but that’s hardly enough to justify the sharp plunge in USDJPY.
The good news is that we don’t have to search for an explanation for why this or that happened after the fact. As traders, we have to stay ahead of the curve, not look in the rearview mirror. That’s what Elliott Wave analysis helped us to do with USDJPY in October. How low can the bears go from here? The weekly chart is giving us a hint already.
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