USD/JPY signal for the summer: bulls to remain in control

The story of the year in the FX space was the stunning rise of the JPY pairs in a relatively short period. Take the USD/JPY, for instance.

It advanced more than 1,400 pips points (i.e., a huge move) from March to May. The amplitude of the movement is important for one single reason – a market rarely retraces such a move. And even if it does, it does it in a much longer time.

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Now that everybody is thinking about the summer holidays, so do the market participants. Summer trading in the FX space is filled with consolidations – exactly what USD/JPY traders should expect in the months ahead.

A triple combination suggests the market will test 130 again

Elliott Waves traders are familiar with the concept of impulsive and corrective waves. An impulsive wave is a five-wave structure where the market advances or declines aggressively. Also, an impulsive wave is labeled with numbers.

But there is no number on the chart above. Only letters.

It means that the rally from March to May, or from 116 to 130, is corrective rather than impulsive. More precisely, it is a triple combination.

Such a pattern involves two connecting waves labeled with x. And, more importantly, a triangle that forms at the end of the pattern.

In this position, a triple combination suggests another leg higher for the USD/JPY pair. But only after another consolidation, most likely a horizontal triangle or an irregular one.

In both cases, the pair looks poised to give 130 another look sooner rather than later. The triangle should have a bullish bias and the lowest point is given by its first segment – wave a, which just completed last week.

Coupled with the huge divergence between the two central banks in terms of their monetary policy, the technical picture points to a consolidation in the short term, followed by another leg higher in the medium term.