The USD/JPY is showing tentative signs of exhausting a long-term downtrend. Last week's low found support exactly at the 2009 reaction low to hint of the completion of a large five-wave structure that originates from the 2007 high. The last leg down also resembles a five-wave ending diagonal, which is often found in the latter parts of an impulsive trend. Also, daily studies are bullishly diverging to suggest that downward momentum is stalling.
More importantly, in bear markets of this magnitude, price-action tends not to merely test key swing lows. Rather, once below the previous swing low, the market generally resumes the downtrend, but at a faster pace. In this case the swing low happens to be the 84.74 pivot and the next test should either illicit a panic sell-off or a false-break rebound.
Currently, the market has produced a normal counter-trend bounce off key support that is now in its fourth day. Counter-trends that exceed 4 days generally exhaust strong trends. Moreover, the 2-day rebound off 84.74 has produced a 2-day weak move down. Thus, if the market fails to test this key level by Friday this would indicate bullish price-action and suggest that a substantial low is in place.
To shift the focus away from a potential freefall to a period of base building, a positive move out of the ending diagonal is required. Above key trendline resistance near the 86.00 handle initially targets the 87.35/88.62 region, which would still be considered a normal retracement within a bear market. Below 84.35, however, will increase the odds of a climactic capitulation.
STRATEGY: BUY at 84.88 risking 84.35, targeting 87.35
