It has been a volatile week for USDJPY. The pair started the session on a positive note and rose to 111.76 on Wednesday. However, instead of keeping up the momentum the bulls quickly exhausted their options and allowed the bears to breach the previous swing low at 110.69 and drag USDJPY down to 110.38 on Thursday. Unfortunately for breakout traders, short positions triggered by this breach soon became losers as the U.S. dollar reversed sharply to the upside against the Japanese yen to close at the 111.00 mark on Friday.
Elliott Wave Analysis Gives USDJPY Traders an Advantage
The good news is none of the pair’s behavior last week was a big surprise to Elliott Wave analysts, who posses a much deeper understanding of how the markets move than what a simple breakout strategy can deliver. The chart below was sent to our clients as a short-term update on Wednesday, September 5th, when USDJPY still appeared to be on its way to a new swing high.
Instead of wondering if the bulls are going to exceed 111.83 or not, we focused on the five-wave impulse pattern, labeled i-ii-iii-iv-v, which took place between 109.77 and 111.83. According to the theory, a three-wave a-b-c correction in the opposite direction comes after every impulse. At the time of writing, USDJPY’s wave “c” down was still missing so it made sense to expect another decline to roughly 110.50.
On the other hand, once the 5-3 wave cycle is complete, the trend resumes in the direction of the five-wave sequence. This meant going short near 110.50 was going to be a bad idea, since a bullish reversal was likely to occur in that area. The updated chart below shows how things went.
The selloff from 111.76 to 110.38 fits perfectly in the position of wave “c” of the simple a-b-c zigzag correction, which has been in progress since the top of wave “v” at 111.83. It took 7 trading days to fully develop and erased 145 pips of USDJPY’s recovery from 109.77. Once it was over though, the bulls were eager to return.
What will USDJPY bring next week? That is the subject of discussion in our next premium analysis due out later TODAY!