· EUR/JPY is in a strong uptrend <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
· The confluence of Fibonacci and wave relationships point to possible end of a 6 year up-trend in EUR/JPY
· Bearish divergence with oscillators on monthly charts suggest that the current rally is exhausting
· 148.40-60 is a very key level in EUR/JPY, we will zoom into our charts to understand why
Introduction
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In the 1930s, Ralph Nelson Elliott discovered that the stock market moves in a pattern of discernible waves. More specifically, he saw that the market would move 5 waves up (1-2-3-4-5) for every 3 (a-b-c) waves down. This is the basic concept to follow when approaching Elliott Wave Analysis. The alternation of 5 waves and 3 waves occurs at all degrees of trend, up as well as down, and within a myriad of patterns. As such, Elliott Wave Theory is complex and trading with it can be difficult, especially in the short term. Without going into detail, the theory is based on mans psychological make up (mass psychology). Longer term charts, which naturally portray a more accurate representation of mass psychology over time, tend to display clearer patterns. The different degrees of trend in this report are referred to as follows (from largest to smallest): Cycle, Primary, and Intermediate. We will begin by looking at where EUR/JPY is in its wave formation of Cycle degree.
Monthly Chart
From 1976 to October 2000, EUR/JPY (using synthetic prices before January 1, 1999) traced out a 5 wave downtrend of Cycle proportion to 88.69. The 5 waves of cycle degree are labeled in roman numerals on the monthly chart below. The roughly 6 year rally that follows (from 88.69 to present) is viewed as the first of 3 (a-b-c) corrective waves. Shorter term charts will show that we may be nearing an end to Cycle wave a. We will zoom in on the next chart to view Fibonacci retracement levels.
Charts created using Intellichart Prepared by Jamie Saettele
Monthly Chart
Taking a closer look at the monthly chart, we notice that the 38.2% and 61.8% Fibonacci retracements of Cycle wave V (164.53 88.69) denoted significant price levels. The 38.2% fibo served as resistance for 9 months as shown in the first circle below while price stalled for a little more than 2 years at the 61.8% fibo as shown in the second circle. Since prior Fibonacci levels were significant, the likelihood improves that additional Fibonacci levels will prove to be topping points as well. As such, the 78.6% fibo is not far above current price at 148.30. Also, RSI and MACD show significant bearish divergence. Divergence on a monthly chart is rare and when we see it, we pay attention. The next chart will zoom in on Cycle wave a.
Charts created using Intellichart Prepared by Jamie Saettele
Weekly Chart
Charts created using Intellichart Prepared by Jamie Saettele
Daily Chart
Primary wave 5 begins on 11/10/2003 at 124.14 and takes the form of a diagonal. Notice that the rise from 124.14 is choppy and as a result its structure is inherently weak as it indicates the exhaustion of a large move. This pattern is known as an ending diagonal and it often ends by spiking above the upper trendline (which current price is at now). The ensuing move down is usually sharp as well. Further, the 5th wave in the diagonal is usually greater than the 4th wave of the diagonal. This is the case now but going a step further we can estimate a potential end to wave 5 with Fibonacci relationships. Wave 4 begins at 141.59 and ends at 130.59 a price distance of 1,100 pips. If we multiply this by 161.8% , we end up with an estimate that wave 5 will be 1,779 pips. Adding this to the beginning of wave 5 places a possible end to the rally at 130.59 + 17.79 (1,779 pips) = 148.38. Again, this is extremely close to our earlier estimates from different relationships, which are 148.30 and 148.60.
Charts created using Intellichart Prepared by Jamie Saettele
Daily Chart
Once again, we are zooming in closer. This time, we are viewing the Minor degree waves of Intermediate degree wave 5, which begins on 6/23/2005 at 130.59. This is the final degree of trend that we will look at. Intermediate degree wave 5 is rare in that wave 1 appears to be the extended wave. One of Elliotts rules is that wave 3 is never the shortest wave. As a result, if what we are seeing is correct, then wave 5 must end before it exceeds the price distance of wave 3. We can again use this relationship to approximate an end to wave 5. Wave 3 begins at 137.26 and ends at 145.50 for a price distance of 824 pips. Wave 5 begins at 140.19. Adding the price distance to the beginning of wave 5 approximates an end to wave 5 at 140.19 + 8.24 (824 pips) = 148.43. Again, this is astoundingly close to our other estimates for an end to the 6 year uptrend of 148.30, 148.60, and 148.38. If wave 5 exceeds the price length of wave 3, then the current wave formation no longer holds. In this instance, there would be room for extended rallies.
Charts created using Intellichart Prepared by Jamie Saettele
Summary
If what is presented above is correct, then we should expect a decline after topping out near 148.30/ 60 but to where? Will the decline be rapid or will it be choppy? We touched on the fact that ending diagonals are inherently weak up-trends. As a result, what usually follows is a rapid decline. However, nothing is a sure thing in trading. Further, what if the pair reverses course prior to the 148.00 figure? Nothing is fact when it comes to forecasting regardless of method. Elliott Wave analysis identifies what can and can not happen and what probability favors. In this case, the confluence of Fibonacci and wave relationships point to a spike and reverse scenario.
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