USDJPY has been in a strong uptrend for the last two months. Is it time for the bulls to take a rest? Traders may want to see what the probabilities show.
Our job as analysts is to try to determine when the trend is most likely to reverse or make a pull-back. In order to do that, we use a method, called the Elliott Wave Principle. It is probably the most advanced price-pattern recognition technique. According to it, trends move in five-wave sequences, called impulses. Every impulse is followed by a correction in the opposite direction. So, in the case with USD JPY, we have to see, if there is a complete five-wave move. If there is one, we should prepare for a pull-back.
And the 4-hour chart shows a very clear impulsive rally, which seems to be approaching the end of its fifth wave. Fifths waves take the form of either a regular “five” or an ending diagonal. Judging from the wave structure, it looks more like the second possibility. Those of you, who have read our article about ending diagonals, probably know that this is a very tricky pattern. That is why there are three different approaches, when it comes to trading, depending on what type of trader you are. The more aggressive your style is, the earlier you pull the trigger – at the top of wave 5 of the diagonal. Conservative traders prefer to wait for the extreme of wave 4 to give away before initiating a trade. And the third choice is the one we fancy – to wait for the lower line of the diagonal to be broken. There is no right or wrong way to trade this pattern. It all depends on you personal risk tolerance and trading style.
If this is the correct count, USDJPY should make a new high above 109.74, but the 110.00 area may serve as a strong resistance and a reversal zone. The first target to the downside is around 108.50.