Evidence suggests that a 12 year triangle is complete at 124.13 and that the USDJPY is headed to a new low in the coming weeks. However, the wave structure indicates one more advance is likely to occur before the next bearish leg begins. Fibonacci extensions and retrace levels identify potential reversal points.
The USDJPY may have completed a 12 year correction in the form of a triangle at 124.13. Triangles unfold in 5 waves (A-B-C-D-E) and the structure above is clearly in 5 waves. There is risk of wave E extending higher towards the next major resistance level of 128.00 but the weight of evidence suggests that wave is complete at 124.13. For one, wave E is close to 61.8% of wave C. Alternating legs of triangles are often related by 61.8% or a derivation of Φ (Phi….618). Wave E would be exactly 61.8% of wave C at 122.57. The top was at 124.13. A difference of just 155 pips when projecting a move that is nearly 3000 pips works out to just over a 5% error. The time relationships between the different legs of the triangles also favor the idea that wave E is complete at 124.13. The weeks that each leg of the triangle took to unfold (from A to E) were 41, 16, 27, 37, 30. The average length of time for each leg is 30.2. Wave E took 30 weeks. The 'look' is right for a top and reversal of significant proportion. A terminal thrust in the direction of the larger trend succeeds completion of a triangle. In the case of the USDJPY, a terminal thrust would result in a drop below the 1995 low of 81.12. A break of the base of the triangle at 101.26 would strongly signal that price is headed below 81.12. However, with the evidence making a strong case that the triangle is complete at 124.13, a longer term bearish bias is warranted against 124.13.
The decline from 124.13 is in 5 waves, which strengthens our bearish argument (the decline from 124.13 is either wave 1 or wave a in a bearish cycle). The rally from 111.59 is in 3 waves and most likely wave a within an a-b-c correction. Wave b of that correction ended at 112.59 as a flat. Wave c is now underway towards the 100% extension of 111.59-117.12/112.59 at 118.12 (this is also close to the 50% of 124.13-111.59 at 117.86). 119.34 is also a possible reversal point (which is close to the former 4th wave of 119.84). In summary, look for a rally to the 118.00/119.00 level before a top and reversal. The next leg is expected to come under 111.59.
This is a very short term chart of the USDJPY (15 minute). The decline from 115.21 is a clear 3 wave correction. This indicates that the rally expected to challenge 118.00 may be underway from 114.35. With the USDJPY currently trading just north of 115.00, reward/risk is favorable for bulls.
Written by Jamie Saettele, Technical Currency Strategist of DailyFX.com
