The USDJPY drop below 104.96 signals that the pair has entered wave iii of 3 (of even larger 3) territory. The implications are that the USDJPY has entered its most bearish period in over 13 years.
Wave 3 within the 5 wave rally from 1.4438 is probably complete at 1.5229. Wave 4 is either complete at 1.5160 or is still underway. A larger wave 4 correction could reach the former 4th wave (iv) at 1.5074. Even if wave 4 is still forming, higher prices are a high probability next week as wave 5 is required to complete the entire bull cycle from 1.4438. Objectives lie above 1.5400; there are 261.8% extensions at 1.5429 and 1.5447. We will look for a top and reversal near there.
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We have focused on the idea recently that “the entire rally from 104.97 to 108.59 could have completed a larger correction” but have also mentioned that “we have subjectively favored a larger rally because of various sentiment measures.” The drop below 105 proves us wrong and we will look to align with bears. What were suspicions are now confirmed. That is, wave iii of 3 of larger 3 (within the decline from 124.13) is underway. There are Fibonacci extensions (161.8) at 97.64 and 98.06. The drop below 104.97 probably signals the beginning of the drop that will challenge the 1995 low near 81. There is plenty of room for the USDJPY to fall over the next few weeks and months. In fact, the pair is entering the most bearish part of its pattern since 124.13. As such, we are on the lookout for shorts.
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“We view the rally to 1.9970 as completing wave iii of larger C (within the A-B-C from 1.9337) and the decline to 1.9761 as wave iv of C. Therefore, wave v is working higher now to complete wave C and therefore larger 2 or B within a bear cycle from 2.1160. The 200 day SMA at 2.0124 may provide resistance.” Cable’s rally is not complete. Near term, maintain a bullish stance as long as price is above 1.9761. As mentioned, the 200 day SMA could provide resistance but so could Fibonacci levels at 2.0248 and 2.0463. The goal in March will be to identify the top of larger wave 2 (or B) from 1.9337 in order to position for the big decline that waits.
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STRATEGY: Bullish, against 1.9761, target 2.0119
The objective that we identified yesterday; the 261.8% extension of 1.1033-1.0832/1.0927 at 1.0410 is just below current price. We are looking for this level to provide support and possibly mark the end of wave 3 within the 5 wave bear cycle from 1.1105. A wave 4 correction is then expected, which could reach the 1.0530 area (former 4th wave) before a drop in wave 5 registers at least a multi-month low. This process should take at least a few weeks.
We contend that the drop from 1.0197 is the final leg in a large expanded flat that began at 1.0248. The drop below .9755 satisfied minimum expectations but form indicates that a new low (below .9710) is required before we can begin to look for a bottom. Possible terminal points from various Fibonacci measurements are anywhere from .9378 to .9691. We will watch form carefully in order to determine the best possible exit. Risk on shorts can be moved to .9845.
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STRATEGY: Bearish, against .9845, target below .9755
We wrote yesterday to “look for a top and reversal near .9500.” The high yesterday was at .9496 and the AUDUSD has dropped over 100 pips since. However, the high at .9496 was probably just wave 3 within the 5 wave bull cycle from .8512. The drop from .9496 is either wave 4 or part of wave 4. .9325 may remain intact since 4th waves are often triangles. A new high in wave 5 probably completes the entire rally from the 2001 low. We will be looking to sell what could prove to be a multi-year high in the next few weeks (probably between .9600 and 1.00). This probably takes a few weeks to resolve itself.
We also expect a new high in the NZDUSD. The decline from .8214 is corrective to this point and could be a small 4th wave within a 5 wave rally from .7814. Potential support is at .8092 (38.2%) and .8066 (2/26 reaction low). The bias remains bullish as long as price is above .7902. A 5th wave rally should begin soon and could test .8364 (100% extension). If the drop from .8214 turns into an impulse, then we will look for short opportunities.
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[1] STRATEGY is a quick summary of our best technical ideas. The ideas are subjective and are subject to change everyday although trades are typically held for at least a few days and sometimes a few weeks or more. Ideas are also included for crosses throughtout the week; these are published at separate articles at DailyFX.
