NZD/JPY - Major Top Likely In Place

Is a NZD/JPY top in place? Let’s see how our Top / Bottom Thermometer list stacks up:

Top / Bottom Thermometer
Percentage Likelihood of a Top: 88%

Weekly Chart Indicates Major Turn

The rally from October 2000 to December 2005 traced out a perfect 5 waves. Waves 2 and 4 (the corrective waves) exhibit alternation, meaning that waves 2 and 4 are different types of corrections (wave 2 is flat and wave 4 is sharp). As always, a 5 wave advance is followed by a 3 wave correction (A-B-C), with waves A and C doing the “correcting”. We know that the correction unfolding since the top of wave 5 in December 2005 at 87.11 is a flat. We know this since the B wave retraced more than 61.8% of wave A. In a flat, waves A and C are often of equal lengths. Based on this property, we can make a forecast that the NZDJPY will decline in a C wave to below 68.19 (bottom of wave A). A target is 66.91, which is where wave C would equal wave A. This would mean that the entire correction since December 2005 would take prices to roughly the 4th wave correction of one lesser degree (see the arrow on the chart) – which is also a property of The Wave Principle.

Daily Chart Confirms Turn Scenario

This is a closer look at waves A and B Wave B has been confined to a tight channel. Price is now testing the low side of that channel. A break below the channel signals the turn.

240 Minute Chart Suggests That This Consolidation Will Be Followed By Another Decline

So far, there are 3 waves down from 85.83 and the consolidation that has followed looks like wave 4. Another decline to below 82.04 should follow soon in a wave 5 decline. This 5 wave decline will make up the first wave of what will eventually be 5 waves down.

Key to Understanding the Trend Reversal Checklist for the Thermometer

The Percentage likelihood of a top or bottom associated with the Thermometer is calculated based upon weighting the 7 components in the checklist.

JPercentile (20%): Price is valued as a percentile, measured against the last 21 days (roughly 1 month of trading) for intermediate tops and 52 weeks (1 year) for major tops. Probability increases that the pair is nearing a short term top when the JPC indicator reads 100%. A reading of 0% indicates the potential for a bottom. Every top has a reading of 100% but not every reading of 100% is a top. Besides the percent reading we also need to see a turn out of the extreme level (ie. If it reaches 100%, we need to have it pointing downwards and vice versa) to determine whether this is a top or bottom. The box is only checked when we see a turn off of extreme levels in the JPercentile reading.

Elliott Wave (20%): Standard Elliott Wave Theory, the box is checked when we see a possible 5 waves complete or 3 waves complete (correction).

Significant Support or Resistance Levels (16%): The box is checked if we have important monthly pivots, or Fibonacci levels capping gains in topping scenarios or providing a support in bottoming scenarios

Volatility (16%): The box is checked if the currency pair has a volatility level below 8%. If a currency pair has a volatility that is too high, then it has a greater likelihood of experiencing swings that may not be as conducive for top or bottom picking because the potential of spikes could cause stops to be taken out prematurely.

Statistical Significance (12%): This box is checked if the move has extended with no retracements for a statistically significant amount of days (ie. 8 straight days of gains or 10 straight days of losses which is quite rare)

Risk Reversals (16%): At the money 25 delta risk reversal positioning tends to be at extreme right before the market turns. This box is checked if that is the case.