I would like to show you how I breakdown an impulsive move (up or down doesn't matter). As I have followed EUR/JPY closely for quiet some time now, I think that would be a perfect example to use.
The first chart I would look at is the monthly or the weekly chart to get a feel for the big trend, which in this case have been down until we broke above the resistance-line in November. As you know I already had the idea, that an important bottom was in place and that a new major uptrend was beginning way before we broke above the ending diagonal resistance-line. However, the break above the ending diagonal resistance-line has add loads of value to my long term count, which is looking for much higher levels in the coming months/years.
The next thing I do, is looking at the daily chart to see if I can count five waves in the direction I expect the cross to move in. As you can see above I can count five waves from the bottom at 94.10 to 104.59 ( that rally represented a move of over 11%, which is a very nice rally in the currency market) I have marked the first five wave advance as wave 1 and as you can see wave 1 was made up of five waves itself.
Okay lets say, that we where smart enough to call the first wave i, where should we expect wave ii to end? As this a new trend beginning we should expect wave ii to be a deep and sharp correction of wave i and in this case wave ii corrected 70.7% of wave i (in the Currency Market we often see corrections hit the 70.7% mark). That said the most common retracement is the 61.8% Fibonacci correction target.
Now that we have wave i and ii in place we can begin to estimate the target for wave iii. You start by measuring the length of wave i and then adds 100%; 161.8%; 200%; 261.8; 300%; 361.8 and 423.6% to the bottom of wave ii. As can be seen above wave iii ended almost exactly at the 261.8% extension target and wave iv took over
Calculating the target for wave iv is the same as for wave ii. However, we should not expect a correction deeper than to the 38.2% - 50% correction area. As you can see wave iv ended right in this area. That said after an extension in wave iii we often see wave iv end already near the 23.6% Fibonacci correction target. Finally it should be mentioned that wave iv can be a deep correction correcting 61.8% of wave 3, but that is not that common.
Now that we have wave i; ii; iii and iv in place we can calculate where wave v will ideally terminate. the first thing we should do is measure the length from the start of wave i to the top of wave iii and the calculate 38.2% and 61.8% of that length and add it to the bottom of wave iv and we now have the two most likely targets of wave v. However, most crosses have their own specialties and for EUR/JPY one of them is, that it often terminates wave v at the 50% target, which also was the case this time around.
Now that we have the first impulsive rally in place we can mark wave 1 and calculate where wave 2 ideally will end. We should again calculate the common Fibonacci correction targets being 38.2%; 50% and 61.8%, but we should pay special attention to where wave iv ended, as the correction of one larger degree have a tendency to terminate close to wave wave iv ended. In this case the 38.2% correction target came in close to the ending point of wave iv, which is why this area could be the termination point for wave 2.
Now we have the first two cycles in place we can start all over again and calculate wave we think wave 3 will terminate and below I have calculated all the possible targets for you.
As you can see the first target for wave 3 is at 110.85, but we should expect wave 3 to extend and therefore it should not end before it has reached at least the 161.8% extension target at 117.31 and it could go even higher than that.
Beside the point of showing you how I break down a chart I also wanted to give you a slight warning. Lately I have see many analyst advocating for a top in EUR/JPY calling for a correction towards 104.50 and some calls for even lower targets. If (because you never know for sure) my count is correct we are in the powerful wave 3 higher (The wonder to behold as Prechter calls it). You do not want to be short as wave 3 progresses and if you do, you will likely be stopped out before you know it. Worse if you don't use stops, then you will see your loss grow until it becomes unbearable and you take the loss just as wave 3 finally terminates. Of cause I don't know, but I don't think you will want to try it, so if you are short or consider going short in EUR/JPY, then DO NOT do it without a STOP.
Please just DO NOT do it...
