A rare form of zigzag (EURJPY)

At the end of May the article Horizontal triangle — is it a reversal or continuation pattern?, in which the cross rate EUR/JPY was analyzed, was released. It was supposed that a downward wedge formed from the top of the global uptrend which suggests further development either of a downward impulse (as a part of zigzag structure), or a downward zigzag.

But the price broke the critical level having placed in doubt the accepted scenario. In this case it remains either to return to the February variant of wave counting in which global double zigzag was considered (refer to Figure 1 below), or to give reasons for a new variant.

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Actually if we consider the double zigzag [W]-[X]-[Y] on the monthly time-frame (refer to the February article System of equations with an endless number of solutions ), we may suppose that wave (B) of [Y] is assuming the shape of a skewed triangle.

At the same time if we analyze this knot on smaller time-frames the impulsive structure of wave C of (B) of [Y] which supposedly is a wedge is a strong argument against this scenario (refer to Figures 3 and 4 below).

It is necessary to make a small excursive here.

Zigzag is the most commonly encountered corrective wave pattern on the FX market.

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An ideal zigzag is a pattern with formula 5-3-5, it supposes approximate equality of legs A and C, and wave-link B equal by depth to 25%..78% of wave A (average value = 39%).

At the same time on the real market sometimes one may encounter variations of this pattern which are zigzags by internal structure while by external form they may remind an expanded flat (i.e. the terminus of wave B goes beyond the beginning of wave A and constitutes 100%..127% of wave A). I believe that in such cases the internal structure not the external form of the pattern under consideration is the determining factor.

I gave several real examples of such variations of zigzag as early as in 2004 (refer toMonthly-0604), and in my book (refer to Figure 3-43). In all these cases the wedge pointed to the direction of further development of the trend.

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That’s why it isn’t ruled out that in this case we observe forming of a rare variation of zigzag A-B-C, when the terminus of wave B went beyond the beginning of wave A. The fact that the uptrend after the wedge has an explicit corrective structure –zigzag at the moment may be an additional argument in the favor of this supposition. Not only internal structure of this pattern 5-3-5, but approximate equality of its leg, retracement of wave [b] of B 49%, and compliance with the guideline of alternation for zigzag (refer to page 140 of my book) point to this.

The completion of wave B below the 172 mark (127% of wave A) and further development of downtrend (wave C) in impulsive mode will be the confirmations of this scenario.

If the supposed zigzag [a]-[b]-[c] of B transforms into an impulse or the price fixes above the new critical level (171.92) this scenario will have to be reconsidered.

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In such a case the scenario considered in the article Horizontal triangle — is it a reversal or continuation pattern? two months ago remains actual up to date — the completed upward impulse [A] or [1] with the truncated fifth 5 of (5). At the moment this very pattern combines optimally all the data and interlinks the wave patterns of minor wave degrees. But the variant with a possible skewed triangle though relegated to the background isn’t cancelled.

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If the supposition is true the truncated fifth 5 of (5) and the extension in the fifth wave (5) of [A] warn insistently about possible impressive price decline while downward wedge A of [B] and almost completed zigzag B of [B] may point to the beginning of the supposed decline in the immediate future.

Note

Given possible trading plans are purely informational purpose only and they should not be considered as trading guides or an invitation to make a transaction.