Last Friday, October 28th, USDJPY rose to a high of 105.53, but eventually closed the week at 104.71. The trend was clearly up since the end of September and Friday’s dip was probably embraced by the bulls as another buying opportunity. Unfortunately for them, 105.53 turned out to be a major top. Instead of continuing to the north, the exchange rate declined significantly and is currently trading near 102.80. But why did this violent sell-off happen in the first place? Well, if you are looking for answers in news and events, we cannot help you. We prefer looking for clues in the price charts, where the Elliott Wave Principle comes in handy.
On October 24th, our premium clients received the following chart.(some of the marks have been removed for this article)
Ten days ago, while USDJPY was at 103.82, our analysis suggested the pair should be able to reach 105.00, but after that a bearish reversal should be expected. We thought so because wave (c) of B did not seem to be complete. Its wave “v” was still missing, which was the reason to prepare for more strength, as long as 103.16 was safe. In the end of the week, 105.53 has already been reached. Next Monday, October 31st, we sent our premium clients an updated chart, which is given below.
In our opinion, wave (c) of B was then officially over with an ending diagonal in wave “v”, which allowed us to identify a specific stop-loss level at 105.53. As long as USDJPY was trading below it, we would stay bearish. In addition, the relative strength index was showing a strong bearish divergence between waves iii and v of (c). As the next chart demonstrates, the bearish strategy paid off.
Ending diagonals are usually followed by a swift and sharp reversal. The 4-hour chart of USDJPY is just another example. So, going back to the question of why did the pair fall so much, the news is unlikely to give something to help you prepare for the next sudden reversal. The Wave Principle, on the other hand, might do just that, because its patterns do not change every other day and the markets have been stubbornly repeating them ever since Ralph Nelson Elliott discovered them in the 1930s. These patterns are the result of human nature, which takes thousands of years to change and evolve. We bet traders in year 2116 would still be able to find them on the charts. The sooner you learn about Elliott Wave, the longer you will be staying ahead of the news. And ahead of reversals, too.