New interesting wave patterns have emerged since our last analysis. For instance, the USD/JPY bearish impulsive price action was unable to break below the daily bottom at 109 and the bullish reversal bounce is now showing strong momentum.
Due to the JPY weakness, you might be wondering which Japanese Yen pair could offer the best trade setup?
This article shares our view on the EUR/JPY, which seems best positioned to capitalize on the Yen downtrend. We also review the market structure and wave patterns on the commodity oil. (Find the video format of this article at the very bottom of the page.)
EUR/JPY Weekly Wave Patterns
The EUR/JPY is currently in a larger wave C (purple) after completing an impulsive bullish wave A and a deep wave B correction. Why?
Here are the main arguments for the current ABC (purple) market structure on the EUR/JPY:
- Completed clear 5 waves (blue) within wave A (purple).
- Shows higher lows and higher highs and is close to the 161.8% Fib target of wave 3 (green).
- Broke above the resistance trend lines (dotted orange).
- Pushed above the bottom (dotted purple) of wave A (blue), which invalidated a potential wave 1.
These points seems to confirm that there was an ABC (blue) correction within wave B (blue) and now a new 5 wave structure could emerge within wave C (purple), similar to wave A.
EUR/JPY Daily Market Structure
When zooming into the daily chart, you can see deep pullbacks between August 2016 and April 2017., which could be explained by two separate wave 1-2s.
The recent rally seems to confirm the wave 3 (green) impulse. Price action is showing a decent bullish trend with a series of higher highs and with a clear uptrend channel (blue/red lines).
This wave 3 (green) does not seem to be completed as yet as price is building a potential internal 5 wave structure (orange). Price is currently at the bottom of the channel and an important decision zone:
- A bullish continuation within wave 5 (orange) of wave 3 (green).
- Or a bearish breakout below the channel, which invalidates wave 4 (orange) when price breaks below the top of wave 1 (orange) indicated by the purple line.
Price has already shown a bullish bounce at the usual 38.2% Fibonacci support level of wave 4 vs 3, which could be a first signal of more upside.
EUR/JPY Bullish Trade Setups Around the Corner?
The bullish bounce at the 38.2% Fibonacci level near 128 has caused price to show a strong rally on the 1 hour chart.
The current bullish momentum is probably showing two wave 1-2 patterns (purple and blue), although there is some uncertainty about the pattern.
In my view, there are three trade setups that are around the corner:
- Bullish bounce at the 50-61.8% Fibonacci levels of wave 2 vs 1 around 129.50.
- Bullish reversal at the support trend line (blue) around 128.50.
- Breakout above the resistance trend line.
I will be looking for bullish candlestick confirmation patterns in all 3 trade setups before making an entry. I want to see clear confirmation signals before taking the trade, which is always a good practice to avoid trading against the momentum.
The EUR/JPY remains the best Yen pair in my view as the USD/JPY remains in a large range and the GBP/JPY has shown a larger bearish correction.
Oil: Corrective Range Soon Over?
The weekly chart of the oil commodity is showing a couple of key aspects:
The bearish momentum is strong and most likely completes a wave 3 (purple).
The current pullback is corrective and choppy, which is typical for a wave 4 (purple).
Once the wave 4 (purple) is completed, a continuation of the downtrend is expected within the 5th wave down.
This wave 5 could break below the previous wave 3 bottom like typical waves do… But when considering the large wave 3 then a double bottom could also work as a logical target for the wave 5, which would then become a “truncated” wave 5 (failure to break wave 3).
The main question is: when can traders expect wave 4 to be completed?
Oil: End of Wave 4 and Start of Wave 5
There are 2 Fibonacci levels we can use to estimate the end of wave 4 and start of wave 5:
- Fibonacci retracement levels.
- Fibonacci time sequence.
I do not use Fib time ratios too often but it is a useful tool for large corrective patterns on a higher time frame.
When we apply the Fib retracement to the weekly chart, traders can see that a 38.2% Fibonacci retracement would be an ideal turning spot for the wave 4. There is also a wave 4 of a lower degree.
On the daily chart, the oil correction could still last for a while when considering time patterns. The 61.8% Fib is around February 2018.
The daily chart also shows how large the correction really is. Corrective patterns are always difficult to assess but currently the path of least resistance looks like this:
- Bearsh ABC correction to complete wave X (green).
- Bullish ABC correction to complete wave Y (blue).
Here are the potential trade ideas:
- A long trade at the key support zone of the 61.8% Fib and trend line (green) around 45.
- Potential long setup at the key support zone of the 127.2% Fib and trend channel (blue) around 39-40.
- Long opportunity after the bullish break of the channel above resistance (red).
- A short trade at the 38.2% Fib around 59-60 as wave 4 completes.
The invalidation level of a larger bullish correction within the 4th wave pattern occurs if price pushes below the 138.2% Fibonacci level of wave X vs W at 39.15. In that case, price could have already completed wave 4 and be in a wave 5.
Many green pips,
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