USD/JPY’s rally from 108.80 came to its natural end last week, when the pair climbed to 114.50. The rate exceeded the mid-May high of 114.36 for what is usually called a “bullish breakout.” Unfortunately, instead of rising even more, the U.S. dollar reversed sharply to the south to reach 111.55 yesterday for a decline of almost 300 pips against the Japanese yen. In the end, the much anticipated bullish breakout turned out to be nothing but a “false breakout.”
Breakouts are something technical analysts spend a lot of time reading and learning about and generally rely on in trading. So it is really annoying when a textbook breakout setup fails like this. Then traders start looking for an explanation. Why did it fail? Or someone to blame. Who made it fail? The bankers? The market-makers? My broker?
One of the many advantages the Elliott Wave Principle has over conventional technical analysis is that Wave analysts rely on breakouts much less often. In fact, the Wave Principle can even warn you about a false breakout ahead. The one we are discussing is just an example.
The following chart of USD/JPY was included in the analysis we sent to clients before the market opened last Monday, July 10. As visible, we were spared the search for an explanation. (some marks have been removed for this article)
Exactly ten days ago, while USD/JPY was hovering around 113.90, this chart revealed the corrective nature of the entire price development since the bottom at 108.13 on April 17. The pair appeared to be approaching the end of a (w)-(x)-(y) double zig-zag correction. Therefore, wave (y) was supposed to slightly breach the top of wave (w) in order to finish the whole sequence. Then, a bearish reversal should be expected.
No matter how precise the analysis, picking tops or bottoms is not worth the risk, so we never advise subscribers to try that. We did, however, write that “staying aside is safer.” It was, indeed, safer than buying the bullish breakout, wasn’t it?