Starting from 2012, USD/JPY has rallied in an impulse wave which appears to have topped in June 2015 at 125.86. As you can see in the chart below, an extended flat correction has started from then (3-3-5). Following this line of thought, next target in the weeks to come for USD/JPY is the 107.00-106.75 level which corresponds to 38.2% Fibonacci retracement.
.Analyzing the C wave of the correction in more details as in the chart below, we can see that USD/JPY is forming a triangle wave 4 after completing wave 3 slightly lower than 1.618 extension of wave 1. The most likely scenario for USD/JPY is that it will swing between the triangle boundaries up to the point where A-B-C-D-E waves of the form (3-3-3-3-3) are completed inside the triangle.
.Our suggestion for this pair for the moment is to stand in the sidelines and watch how this action will play out, because triangle 4s are always the most difficult ones to trade as stops are hit on both sides, leaving traders clueless.
.The most risk-averse strategy would be to wait until the triangle is breached on either side, with a higher probability of being breached on the below trend line. In case the triangle is broken below, first target would be February 11-12 (2016) low. Next target is the important support area of 110.00-109.00. Lastly, if all those levels are broken, USD/JPY can eventually touch our target of 107.00-106.75 in the upcoming weeks.
Invalidation: It is crucial that the triangle is not broken on the upside, even in that case, 115.96 low of wave 1 should not be invaded. Should that happen and USD/JPY reaches 116.00, we need to reevaluate the count.
Next Week’s FED decision will certainly play an important role in directing USD/JPY, however we need to keep in mind that as long as the triangle is not broken, we do not have confirmation to enter into a swing trade, unless we want to face an unfavorable 1:1 risk reward ratio.