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JPY Through the Elliott Waves Theory Lens


Posted: Thursday, February 11th, 2021

Estimated Reading Time: 3 minutes

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The Japanese Yen (JPY) has emerged as one of the strongest currencies during the COVID-19 pandemic. After an initial bounce, the USDJPY, the main JPY pair, started a slow descent. This article looks at the JPY through the Elliott Waves theory’s lens by analyzing the USDJPY price performance in the last years.

Elliott Waves Theory

What Is the Elliott Waves Theory?

The theory belongs to the stock market. Almost a century ago, Ralph Elliott, an accountant, has put the basis of it by studying the stock market’s patterns.

Fast-forward to the present; the Elliott Waves theory is wildly used by technical traders around the world. It involves interpreting past price action by using impulsive and corrective waves that belong to various market cycles. Put it shortly; numbers reflect impulsive counts, while letters show corrective market activity.

I will not discuss the theory here. Instead, I’m presenting a possible scenario on the USDJPY that puts the bigger picture under an interesting perspective. This analysis was made a couple of weeks ago when the pair traded in the 103 area.

Complex Elliott Waves Correction on the USDJPY Pair

Elliott divided the corrective waves into simple and complex. On the bigger timeframes, the USDJPY forms a possible terminal impulsive wave.

Unlike a regular impulsive wave, each wave part of this structure is corrective, despite labeled with numbers. Therefore, the 5th wave expected, the final segment in the pattern, should be corrective.

Once reaching that conclusion, the next logical step is to see what kind of corrective wave the market forms – simple or complex? Because most fifth waves part of a terminal impulsive wave are complex, the bias is that this one is as well.

Elliott Double or Triple Combination

A double or triple combination has one, respectively, two intervening x-waves. Up to this point, we have one, but incomplete so far.

The secret to properly position the x-wave is to make sure it does not retrace more than 61.8% of the previous a-b-c of the same degree. Moreover, the market must touch the so-called 0-x trendline.

More precisely, all that a trader needs to do is to draw a line that connects the start of the pattern through the end of the x-wave. By projecting it on the right side of the chart, the price action must pierce that trendline, typically before the end of the x-wave.

Applying such a simple rule, leads to the conclusion that the x-wave must be higher. The minimum level, according to this scenario, is around 108 or 107, depending on the moment the price reaches the declining blue line. The more time passes, the lower the intersection point.

What Comes After?

At this point, it does not matter if the USDJPY pair forms a double or a triple combination. What matters, from an Elliott Waves point of view, is that the market should end the x-wave while not reaching the 2-4 trendline (i.e., the declining black line).

Whenever a 2-4 trendline appears on a chart, the 1-3 must exist somewhere as well. Dare to guess the level the USDJPY pair should intersect the 1-3 trendline if this scenario based on the Elliott Waves theory is accurate?

Hint – 74.

What may cause the JPY to strengthen that much against the dollar? At this point, nothing comes to mind, although some interesting developments happened recently. For example, the Bank of Japan signaled it is willing to let long-term rates rising.

Time will tell where the market will go. For the Elliott Wave theory scenario to remain valid, the price must stay below the 2-4 trendline.

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