Calm reigns in financial markets. Yesterday, the Wall Street Journal reported that volatility had declined significantly since the banking crisis in the United States.
One may even ask – what banking crisis? The S&P 500 volatility just hit the lowest in 15 months. Moreover, oil volatility is at an 18-month low. Furthermore, FX volatility is the lowest in a year.
This is bad news for speculators. When the market is not moving, there is not much to do.
But some markets moved more than others. The JPY pairs have defied the low volatility trend in the FX market. One particular pair is poised for more gains – the EUR/JPY.
According to the Elliott Waves theory, the EUR/JPY cross ended a running correction. What follows should be an extended 3rd wave that should complete only with a rally way above the current levels.
EUR/JPY chart by TradingView
EUR/JPY has completed a running correction
A running correction has one main feature – it ends above its starting point in a bullish trend. In other words, it means that the Elliott wave that follows, typically the extended 3rd wave, starts from way above the 1st wave’s end.
Another characteristic of such a correction is the length of the extended wave. Instead of the classic 161.8% extension when compared to the length of the 1st wave, this time, the 3rd wave’s length should exceed 261.8%.
Finally, a running correction usually ends with a triangle – a contracting one. In this case, the EUR/JPY exchange rate completed a triangle when the US banking crisis took place.
Therefore, while for some traders, the decline in the JPY pairs was seen as evidence of financial market turmoil, for others, it represented an opportunity to buy at better levels.
What to expect next from the EUR/JPY cross pair?
First, the market should continue to rise and break above the upper edge of the bullish channel seen in the chart above. That is mandatory for the 3rd wave and such a break confirms the right Elliott setup.
Next, the rally should continue towards 160 and above.
Sure enough, such a move is not going to happen overnight. But any correction from this moment on should be shallow and an opportunity to load some more for the 165 target.
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