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As USDJPY Plunges, Ralph Elliott is Smiling Somewhere

It has been a wild ride for USDJPY traders last week. The pair opened at 111.31 on Monday and rose to 111.83 on Wednesday before crashing to 110.69 by Friday. It still managed to close the session above the 111.00 mark, but that is hardly a big relief for breakout traders, who thought joining the bulls above 111.50 was a good idea.

If they do not want to make the same mistake again, they have to understand what caused USDJPY’s sharp bearish reversal. We are not going to dwell on external factors like economic news or events to explain the pair’s behavior, because their impact can only be identified after-the-fact. Analyzing them will not make traders better prepared for the next time.

Instead, we will focus on the Elliott Wave Principle. First, because its patterns tend to absorb external information and second, because it helped us stay ahead of USDJPY’s sharp u-turn last week. The chart below was sent to subscribers as a mid-week update on Wednesday, August 29th, while the rate was still hovering around 111.20.
USDJPY Elliott Wave analysis August 29th
As visible, this chart made us expect a rally to approximately 111.80, followed by a bearish reversal. The Elliott Wave logic leading to this assumption was simple: the decline from 113.18 to 109.77 looked like a simple a)-b)-c) zigzag correction with a triangle in the position of wave b). According to the theory, once a correction is over, the larger trend resumes. And since the larger trend, which preceded this correction, was pointing north, it made sense to expect a five-wave impulse to the upside to emerge from the bottom at 109.77. On Wednesday morning, its wave “v” was still missing, hence the short-term positive outlook aiming at 111.80.

On the other hand, every impulse is followed by a three-wave retracement in the opposite direction. This simple, but important rule, indicated that USDJPY was weaker than it appeared and prevented us from trusting the bulls too much. The updated chart below shows where USDJPY stands at ahead of Monday’s open.
USDJPY updated Elliott Wave analysis
The five-wave impulse pattern from 109.77 was complete by the end of the day. It then took the bears two days to erase over 110 pips of its progress. While the much bigger camp of news-followers had to deal with the impossible task of predicting the market’s exact reaction to any upcoming statements and reports in the economic calendar, the much smaller group of dedicated Elliott Wave analysts was already given a hint about USDJPY’s intentions. Furthermore, in contrast to the constantly changing external data, which allows an almost infinite number of different interpretations, the Elliott Wave pattern which helped us prepare for the recent USDJPY reversal was very similar to the one Ralph Nelson Elliott discovered over eight decades ago, in the 1930s. Some things never change.

What will USDJPY bring next week? That is the subject of discussion in our next premium analysis due out later TODAY!



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