There is a reason why it is called “trading” and not “bottom/top picking”. The latter is literally impossible even with the best trading tools and techniques. Even the Elliott Wave Principle, which we consider to be the best method for price behavior analysis, cannot tell us the exact price level at which the market is going to change direction. It can, however, provide a road map for us to follow, sometimes months in the future. USDJPY is a recent example.
USDJPY, July 23rd
The chart below was sent to our subscribers nearly three months ago – before the market opened on Monday, July 23rd. It shows that under the right circumstances, traders can actually prepare for an entire pattern without worrying about all the news that is going to be taken into account by the market as that pattern unfolds.
As visible, the recovery from 104.64 to 111.40 was a textbook five-wave impulse in wave a), labeled i-ii-iii-iv-v, where wave i was a leading diagonal. Wave b) dragged USDJPY down to 108.11, but the bulls were still alive and managed to lift the pair to a new high of 113.18.
Since wave a) was a five-wave impulse, wave c) was supposed to develop as a motive wave, as well. The problem was that the rally between 108.11 and 113.18 consisted of only three waves, labeled a-b-c. The only remaining option for wave c) at that stage of development was an ending diagonal, where each wave is a three-wave sequence.
A USDJPY road map to follow
Hence, we assumed that on July 23rd USDJPY was in the middle of wave ii down and waves iii, iv and v should eventually lift the exchange rate to a new high for the year. The chart above did not tell us where the exact tops and bottoms will form along the way, but it was still very useful as a road map.
This road map has been helping us put things into perspective during the last three months. So when USDJPY pulled back from 114.55 and closed at 113.70 on Friday, October 5th, we knew it was too early to buy the dip.
Wave ii found a bottom at 109.77 on August 20th. A strong three-wave rally to 114.55 followed in wave iii. Wave iv had to at least touch the high of wave i, but only a decline to 112.50 – 112.00 would give the pattern its proper shape. In other words, the Wave principle indicated USDJPY should lose at least another 120 pips in wave iv. As it turned out, 120 was a conservative number.
The U.S. dollar fell to as low as 111.83 against the Japanese yen last week, losing almost 190 pips in just five trading days. Despite all the economic reports, interest rate decisions from central banks, political news and rising trade war tensions during that time, our USDJPY Elliott Wave road map delivered some very satisfactory results in recent months. Unfortunately, even the best maps cannot be relied on forever…
What will USDJPY bring next week? That is the subject of discussion in our next premium analysis due out on Sunday!