More than a month ago, on January 10th, we posted “NZDJPY Has Four Technical Reasons To Fall”, saying that “NZDJPY should soon be expected to form a top and reverse to the downside, probably towards 80.00.” By the time it was published, NZDJPY was trading around 92.70. On February 3rd, it touched 84.03, so it turns out “four” was enough. 870 pips in less than a month is not bad at all. However, 84 is not 80, so let’s take a look at the wave structure of the recent decline. Does it suggest we should prepare for more weakness?
The chart above shows the 10-figure sell-off from 94 to 84. As visible, it can easily be counted as a five-wave impulse. Every impulse is followed by a three-wave correction in the opposite direction. Today, NZDJPY stands close to 88.00, following a three-wave (a-b-c) recovery from 84 to 89. This means the pair has already drawn the common 5-3 wave cycle. According to the Elliott Wave Principle, the exchange rate is supposed to continue in the direction of the impulsive sequence. Of course, the market could always choose to extend the retracement into a double zig-zag (W-X-Y) for example, which will make it more time-consuming. Nevertheless, the impulsive structure of the decline gives us a reason to conclude that as long as the invalidation level of 94 stays untouched, NZDJPY should be looked at from the bearish side.
