USDJPY closed at 111.72 last week and is now within striking distance of its 2019 high of 112.14. But just two weeks ago, the pair was down to less than 110.00 after a sharp selloff from 111.70.
Instead of joining the bears simply because the price was falling, we looked for an Elliott Wave pattern to guide us. The chart below, sent to subscribers before the open on Monday, March 25th, shows what we found.
The hourly chart of USDJPY revealed that the decline from 112.14 had the structure of a simple a-b-c zigzah correction. The five sub-waves of wave “c” were clearly visible, as well. According to the Wave theory, once a correction is over, the larger trend resumes.
USDJPY – Staying Aside at First
Since USDJPY was rising prior to that three-wave pullback, it made sense to expect a bullish reversal soon. However, picking tops or bottoms is never a good idea. First, because it is impossible to identify a specific stop-loss level. And second, because the market can simply dismiss the pattern you relied on for the reversal and move on in the same direction. That’s why we thought “staying aside is the best decision.”
By Wednesday, March 27th, the situation was much improved for USDJPY traders. The chart below was included in the mid-week updates our clients received that day.
With the bullish reversal already in place it was now possible to identify the bottom at 109.70 as the invalidation level for the positive outlook. This meant that “as long as USDJPY trades above 109.70, the big picture positive outlook remains valid.“
A Trading Setup Presents Itself
A small three-wave pullback in wave ii was expected to offer a good risk/reward buying opportunity. The next chart shows USDJPY as of today.
Wave ii dragged the pair to 110.02 on March 28th, but 109.70 was never threatened. On April 5th, USDJPY reached 111.82, up 180 pips from the low of wave ii. In that case, the reward turned out to be six times bigger that the risk taken.
Just A Pattern is Not Enough
The bottom line is that spotting a clear pattern is not enough. If this pattern doesn’t allow the trader to identify a specific invalidation level, it is nothing more than temptation. Furthermore, even when a key level is identified, the potential reward must be at least twice as big as the risk. Otherwise, the risk is not worth taking.
What will USDJPY bring next week? That is the subject of discussion in our next premium analysis due out late Sunday!