The GBPJPY is on many traders minds as the pair approaches the 240.00 figure (again). The pair has recovered about 62% of its July-August drop from 251.10 to 219.30 but individual patterns in both legs of the cross and the cross itself warn that now is not the time to turn bullish for a test of the high.
A simple RSI study suggests that the GBPJPY may be in for a much bigger decline. In this chart, the bars are painted red to signal when RSI is below 40 and blue to signal when RSI is above 60. The blue and red designate the trend as bullish or bearish. The black bars are more or less consolidation periods. If a trader were using this information in a strategy, directionality would be determined by the last colored bar (blue or red). Since 1998, there have been 5 bearish signals. The first one was obviously good. The next 3 were false and the most recent signal occurred in August. The advance since should be viewed as a consolidation.
From an Elliott Wave perspective, the rally from 192.62 occurred following the breakout of a triangle. Triangles lead to terminal thrusts. In other words, price comes back to the center of the triangle following completion of the breakout rally. The rally is in 5 waves (not labeled but the form is clear), indicating a high probability that a top is in place at 251.10. In this case, the center of the triangle is near 200.00.
If you follow the daily technicals, then you know that we have been favoring a rally to 118.00 to complete the corrective rally from 111.59. 118.12 is where wave C (from 112.59) would equal wave A (111.59-117.12). Equal legs in an A-B-C correction are quite common. The next level of resistance is the 119.34/84 area (61.8% of 124.13-111.59 / former 4th wave). In summary, we are looking for a top and reversal in the 118.12/119.84 area.
The GBPUSD decline from 2.0654 is clearly in 3 waves and is therefore corrective. However, the advance from 1.9879 is far from impulsive at this point as every top overlaps with every low. Since the rally is not an impulse, and therefore not a 3rd wave is expected to break above 2.0654 , then what is it? We proposed a double zigzag count in the technicals a few days ago, which we still see as the most probable count (a double zigzag is a complex correction). If the rally is corrective, then the everything from 2.0654 is part of a larger correction such as a triangle or a flat. Under this interpretation of the pattern, price is expected to exceed 2.0494 but then reverse.
If the two legs of the GBPJPY cross (GBPUSD and USDJPY) are expected to complete rallies soon then the GBPJPY will do the same thing. The count is similar to that of the USDJPY. An A-B-C correction from 219.30 is nearing completion (wave B is a triangle). The Fibonacci zone of 238.95-244.29 (61.8%-78.6% of 251.10-219.30) is where the reversal is expected to occur. Similar to the GBPUSD, the decline from the top (251.10) is corrective but so too is the advance. The rally that ends in the Fibonacci reversal zone will be wave B within a large A-B-C decline from 251.10.
The USDJPY rally is expected to end somewhere between 118.12/119.84 and the GBPUSD near 2.0500. Multiplying the rates suggests that the GBPJPY rally should end somewhere between 242.15 and 245.67 (mostly within the Fibonacci reversal zone).