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USDJPY January 2014 Forecast

Updated on January 10, 2014

For the informed traders and investors who have been watching the rapid rise of USDJPY (which is the drop in value of the Yen relative to the US Dollar) since 2012, the burning question is whether this move will end this pair’s downtrend, which dates back as far as 1998. The monthly chart provides some perspective and backdrop for this move up, which will likely have caught many technical traders by surprise.

Monthly Chart: Is the Downtrend Intact?

In many ways, newer traders could be forgiven for believing that this is a classic move like any others: Price has pulled back close to a level of resistance in a clear downtrend, and thus the logical move would be to begin nibbling at short positions. This might indeed be the correct move, but there are arguments both for and against this.

The main case against initiating a short is the momentum this pair has exhibited as it reaches this zone. In an ideal, well-behaved downward trending market, one would expect to see sharp moves down followed by relatively shallow corrections back up. A steep move such as the one on this chart suggests that the party may be over.

Nonetheless, it is not for traders to declare a victory for the buyers just yet. Until all the rules of trend change have been fulfilled, the systematic trader would most likely prefer the short side in the bigger picture. However, he would also be wary of the momentum just described, and prepared for price to overshoot the resistance level by a fair bit.

In these circumstances, the monthly chart does not provide sufficient detail for the trader, and the weekly chart has to be consulted.

Weekly Chart: More Evidence of Bearishness

The weekly chart supplies a more reassuring picture for bears, as price has carved out a clear five-wave Elliot pattern. For the uninitiated, this usually indicates upcoming bearishness. There are only three unbreakable rules in performing Elliott wave counts:

  1. Wave 2 cannot go below the low of wave 1. This condition has obviously been fulfilled.
  2. Wave 3 cannot be the shortest of waves 1, 3 and 5, and indeed it is usually the longest. In this case, the wave 3 marked on the chart is definitely longer than wave 1, so this condition is fulfilled as well.
  3. Wave 4 cannot go below the high of wave 1. As a suspected wave 5 is in progress, the low of wave 4 can be identified with a high degree of reliability, and it is clearly above the high of wave 1.

In addition, divergence is likely to be forming on many indicators. That is evidence by the fact that the upward swings in price have been steadily losing momentum. Divergence is a tool used by technical analysts to identify major turning points in price, and it usually will involve an indicator of some sort. An in-depth discussion of this topic would go beyond the scope of this article, but it is a sufficiently strong observation that declining momentum in the price swings are likely to result in either a reversal or at least a period of consolidation coming soon.

Weekly Chart: Resistance Zone

The triangle consolidation pattern that occurred just prior to this breakout is practically textbook, regardless of school of thought, although it notably perfectly respects Elliot wave triangle conditions of having five swings within it. The triangle breakout point has been marked, and by applying a Fibonacci expansion technique, resistance can be estimated. The expansion tool is an extremely valuable tool for forex intraday and end-of-day traders both. It measures how far price has gone from the point of breakout in relation to a significant formation on the chart. In this case, that formation is the height of the triangle.

The two pink lines outline a zone of resistance which comprise of the 0.618 and 1.00 Fibonacci projections. They bracket the declining line of resistance most neatly, completing the analysis on the weekly chart by providing traders with a working hypothesis for the zone of resistance: 104.98-108.75.

Although this zone is approaching 400 pips, it is worth remembering that there is potentially 1200 pips or more of downside, should the Elliott wave pattern discussed earlier develop perfectly.

Finally, a look at the daily chart provides more information as to when the patterns described may manifest.

Daily Chart: Price Beginning to Struggle

The daily chart shows price struggling to break the line of resistance, and indeed this may be the beginning of the move down. However, the author suspects that there will be a last spurt to the upside before price begins to turn down (assuming that it does). This is suggested by the fact that the daily chart has exhibited very steady upside momentum, and there is yet another rising line of support to contend with before a move down can be considered to have properly begun.

Kaye Lee is a private fund trader and the Head Trader Consultant/Mentor for StraightTalkTrading.com.

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