Is The USD/JPY Rally Done? Investors Brace For A Pullback

USD/JPY trades above 116 for the first time in five years. Is it time to expect a pullback? Here’s what the Elliott Waves theory tells us. 

A relentless rally on the USD/JPY started during the COVID-19 pandemic. No matter the news, investors sold the Japanese yen and bought the US dollar with such conviction that the USD/JPY exchange rate jumped from close to 100 to over 116 yesterday.

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Moreover, no pullbacks existed all the way up. The rally shows five separate segments, which may be interpreted as an impulsive wave, but it is too early to tell. According to the Elliott Waves principles, a forecast is the outcome of a logical process that must start from the larger timeframes.

This is what gives bears hope – the analysis on the larger timeframes. The weekly timeframe suggests that investors should brace for a pullback.

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2-4 trendline must hold

The larger perspective reveals a terminal impulsive pattern. In such a pattern, the market remains below the 2-4 trendline most of the time, and a false breakout is possible only under specific conditions.

Therefore, before considering a false breakout, traders must work with the possibility that the price action does not break the 2-4 trendline before the 5th wave ends. As such, aggressive bears may want to short the pair here as the market is very close to the trendline.

Can we have a false breakout?

The 2-4 trendline may experience a false breakout only under two circumstances. One is a flat with a failure forms as the 5th wave. Another one is that the 5th wave is a triangle.

But even so, the breakout should be faded, and a move towards the 100 pivotal area is likely. Therefore, regardless of the scenario for the 5th wave, the Elliott Waves theory suggests that the rally will likely end with the current move above 116.

100 remains a pivotal area

The round 100 area remains pivotal. This is the area from where the pair bounced after Donald Trump’s election in 2016. While the stock market continued its rally, the USD/JPY failed to follow, being caped by the 2-4 trendline.

If the 2-4 trendline was strong enough to offer resistance in the first place, can it do the same again?