On April 20th, we wrote “an important time relationship also favors a turn from near current price. The 1.3666-1.1638 decline took 47 weeks to unfold. A Fibonacci turn date would occur at 47 x 1.618, which is 76 weeks from the 1.1638 low. Next week is the 76th week.” As it happened, the EURUSD hit 1.3680 the next week on April 27th (the 76th week from 1.1638). For the original article, see http://www.dailyfx.com/story/charting_center/weekly_chart_analysis/Wave_Counts__Divergent_Oscillators__Pivot_1177085359949.html in order to understand what we?ll address today.
On April 20th, we wrote “an important time relationship also favors a turn from near current price. The 1.3666-1.1638 decline took 47 weeks to unfold. A Fibonacci turn date would occur at 47 x 1.618, which is 76 weeks from the 1.1638 low. Next week is the 76th week.” As it happened, the EURUSD hit 1.3680 the next week on April 27th (the 76th week from 1.1638). For the original article, see http://www.dailyfx.com/story/charting_center/weekly_chart_analysis/Wave_Counts__Divergent_Oscillators__Pivot_1177085359949.html in order to understand what we?ll address today.
The chart above plots the EURUSD rate and net speculative positioning, as reported by the CFTC. Tops are always accompanied by extremely long speculative positioning. Notice that positioning from early 2002 to early 2004 was relatively stable and did not change much, but the EURUSD skyrocketed. This is the sign of a healthy bull market. Longs got out of control in December 2004 (circle) and the EURUSD plummeted soon thereafter. Compare the 2002-2004 net positioning and price action with the late 2005 to early 2007 net positioning and price action. Net longs skyrocketed, yet the rate of change in price was small when compared to the 2002-2004 period. A market that will not go significantly higher on that kind of buying is a big warning sign (for bulls).
The rally from the 1.1638 low is most likely a W-X-Y correction in wave B known as a double zigzag. The drop below 1.3664 creates overlap in the rally from 1.2482, meaning that the rally can not be labeled an impulse wave. There is still the chance that the EURUSD exceeds 1.3680 in an ending diagonal from 1.2482, but even then, price should still drop close to the parallel channel line beforehand. The sentiment backdrop makes this an unlikely scenario and our favored view has the decline from 1.3680 tracing out waves i and ii of a 5 wave decline that will be labeled wave 1 of C. Wave C is expected to travel below 1.1638 and last about one year (wave A took 47 weeks). 1.3680 must remain intact.
We certainly had our doubts about the validity of the decline from 1.3680-1.3392, but the drop from 1.3552 is the first impulsive downside action we have seen since early January. If the larger bearish bias is correct, then price should drop close to 1.3086 next week or the week thereafter. On the other hand, if 1.3264 holds and price rallies back to 1.3392, then the long term bearish outlook is most likely incorrect and we would switch to the alternate count which has an ending diagonal unfolding from 1.2482.