A Big Change Coming for USDJPY Traders?

USDJPY is at an important long term juncture.  First, let’s look at the long term Elliott wave picture.  Chapter 7 of Sentiment in the Forex Market (published in 2008) reads.

“Wave 4 completed in late July 2007 in the form of a triangle (a-b-c-d-e).  Expectations then are for a drop below the 1995 low at 81.12 to complete wave 5.  Since triangles lead to terminal thrusts, the 5th wave low will give way to a rally that could reach the triangle extreme near 150.00.  In summary, expect price to come under 81.12 before a multi-decade low is registered.”

The rally from the 2011 low counts as a completed 5 wave advance.  The implication is that a corrective process (weakness to a broad sideways range that could last at least several years) unfolds before strength can resume towards 150.  That corrective process may be underway now, especially considering that the top in 2015 registered near a long term trendline confluence (underside of line that extends off of the 1995 and 2005 lows and line that connects the 1990 and 1998 highs) and the 2007 high (end point for cycle wave 4).  Also, important behavior changes have materialized in years that end in 5 (1985, 1995, 2005) and a top registered after the last 3 year rally (1994-1996).

USDJPY Yearly

USDJPY Yearly

Trading wise, price action since December 2014 would complete a head and shoulders top on a drop below 115.57 and yield a target zone of 105.30-106.50.  The target zone would be ‘in line’ with Elliott wave guidelines that suggest a corrective process terminates near the former 4th wave of one less degree (that zone is 101.07-105.44).

USDJPY Weekly

USDJPY Weekly

In summary, long term technical observations reveal a potential inflection point in the USDJPY exchange rate.  Trading behavior in 2016 may look quite different from what traders have seen over the last 4 years.