Everything was going so well for USDJPY and crude oil bulls until last week, when both the exchange rate and the WTI crude price made sharp bearish reversals. Oil fell from as high as $72.88 to $67.40 a barrel, while USDJPY plunged from 111.40 to 108.95. Normally, the media tried to explain the selloffs with different external factors such as Vladimir Putin saying that $60 a barrel oil suits Russia. USDJPY’s decline, on the other hand, is supposed to be the result of dovish Fed minutes in addition to rising geopolitical tensions.
Elliott Wave analysts, however, prefer not to waste energy on after-the-fact explanations. Instead, we focus on the Elliott Wave patterns that cause the market moves the news would later explain. Here, we think one such pattern is the reason USDJPY and crude oil fell last week. Take a look at it below.
The pattern in question is called an “impulse“. Impulses are five-wave structures, which the Wave principle states are always followed by a correction in the opposite direction. In USDJPY’s case, there was a textbook five-wave impulse to the upside from 104.64, so it made sense to expect the bears to return soon, especially since the RSI indicator was also supporting the negative outlook by showing a bearish divergence between waves iii) and v). Crude oil is a completely different instrument in an entirely different market. Nevertheless, the same logic was applied.
Crude oil’s rally from $58.10 also took the shape of a five-wave impulse pattern, despite the fact that it did not look exactly the same as USDJPY’s. In fact, it was quite ugly, but still carried the same meanings – that a bearish reversal should follow. The RSI depicted a divergence here, as well. So instead of joining the bulls in USDJPY on May 21st or buying WTI crude oil on May 23rd, we thought staying aside was a better idea. The updated charts below show what happened next.
USDJPY did not go down right away. The pair climbed to a news high of 111.40, but the bulls’ happiness was short-lived as the bears returned with a vengeance and erased 245 pips by Thursday. Crude oil’s crash was hardly a surprise either, despite the completely different geopolitical motives behind it.
It turned out oil’s top was already in place at $72.88. The following slump to $67.40 so far was not the result of Vladimir Putin’s comments, but of the complete impulse pattern which preceded them. In a sense, there stage was already set for a bearish reversal and only needed a catalyst.
USDJPY and crude oil demonstrated something Ralph Nelson Elliott discovered in the 1930s – that “the habit of the market is to anticipate, not to follow.” So the next time you start to obsess over what will Donald Trump, Kim Jong-un or Vladimir Putin say or do next, do not forget to take a look at the charts. They might hold the answers already.
