Notice the relative strength of NZD versus AUD. Prices are still headed lower, in our opinion, but kiwi’s ability to remain sticky to the upside likely means Aussie has further to fall. Still the action down from the wave (ii) high appears to be nearing a complete impulse, and the continued inability to close back above the up trendline is trouble for the bulls. Any move back above the .6860 level would be us on alert for something less bearish. Until then, remain bearish.
USDCAD didn’t stop at our cited “Huge Support,” but prices are comfortably back above it now. Also, notice how the wave (b) reversed up from just below that horizontal red line. We’re looking for further upside this week, to be followed by a small downward correction. Wave © will equal wave (a) at 1.3325, which is a common relationship in zigzags. Only a drop back below the 1.2837 level will call the rally into question.
We are confident that an impulsive rally up from the low is complete. So, now, we should allow for a corrective decline which should retest the broken red up trendline. Then, we should prepare to short yen as a big rally will be possible. Some pundits have suggested that there was a central banker agreement at the G-20 meeting in China several weeks ago. And, with the recent G-7 meeting, perhaps it has been suggested that the Japanese should refrain from “manipulating” the yen weaker.
But, at some point in this currency war, it’s going to be every country for himself, and the Japanese will debase the yen substantially. When they do, we can look for something disorderly to the upside in USDJPY. Let’s err on the side of being yen bearish for the next decade or so.
Happy Trading!
The Wolf
Shane, great question that really speaks to, “how should i define a market.” There’s no easy answer, but I think you’ve given the short version 3-4X is the “one larger degree.” Remember that there are other ways to define markets like a line chart, which is essentially a “close only” chart. Is that the representation of the market or, should you include the market extremes?
One guru seminar I attended, who wrote a book that is included in the CMT course suggests you should exclude extremes in markets since, “why should you use a price where someone died a horrible death.” I’ve always believed in using candlesticks and not ignoring extreme price swings, though.
The fact that you’re asking these questions means you are on the right path, in that you’re trying to define terms rather than just get in to make a quick buck.
Best, of luck,
The Wolf
The trendline offered more support than we thought it would. Still, we see the bounce as a corrective wave 2 with either Friday’s high wave iii of © of 2, or that we should see that top early week. Any push past the 61.8% retracement will begin to argue that something less bearish is taking place.
We’ve argued against the idea of any “policy divergence” in the US as the economy isn’t healthy enough to allow the Fed to raise rates (since it will refuse to raise rates to actually cause a recession). But, there’s still the matter of the under-capitalized European banks and slow growth in the EU, which we believe will cause upcoming euro weakness.
For example, take a look at the following charts of three European banks, DB, CS and BBVA:
With all three, their consolidations point lower, and potentially much lower. All of these consolidations happened in an economic environment that has been at least benign. Should economic conditions deteriorate which, given our Junk Bond Bubble thesis, we think it will, they all three could require additional capital. In a similar manner to Noble Group’s “surprise” capital raise last week at a 63% discount to the market, or a sovereign bailout. Either way, those actions will likely be viewed as “euro” negative.
It’s possible that the pound is going to seek higher prices, but we’re not going to flip to that view yet. Prices have repeatedly turned back down from near the red horizontal line, and this one seems to end that way too. Look for prices to finish off some final subdivisions higher early next week, followed by a bearish reversal. We will likely avoid this pair given the upcoming news risk.
Prices only tested the lows prior to the upside reversal, but we continue to think Aussie is headed lower, and potentially a lot lower. We have a five wave impulse down from the wave (B) high, and prices are now back into trendline and structural resistance. We do need to allow for prices to push a bit higher before the wave 2 top is struck, but we’re looking for an opportunity to return to an aggressively bearish stance. Notice the many Sustainable Bear readings into the wave 1 low. In addition, if you back out to a weekly chart it’s bearish too.
We’re looking for a reversal bar and follow through to the downside to confirm our count. That’s really what we’re always looking for: The market to act on our perceived view as quantified by Elliott waves. Rather than think of Elliott waves as the end all, they are more a way to think about markets. If the market doesn’t confirm your Elliott count, what good is it? Do you want to fight a market for months or years? We don’t. We’d rather understand that markets can trade against fundamentals, and it’s only when the market begins to recognize the underlying deterioration in fundamentals does it matter. In other words, “the trend is your friend; don’t fight your friend.” The “downward reversal bar/follow through bar” would be our clue that the market recognizes AUDUSD is heading to new lows. And, at that point, it gives us a logical risk control (i.e. stop) level.
The action down from the wave C high looks like a three wave correction that’s complete, given the blast higher last week. As such, without an immediate downside reversal that takes out the wave X? low, we’re going with the above view. That view certainly questions our other dollar strength view and does give us a bit of pause. Nonetheless, we’d look to play weak dollar themes here, while using AUDUSD to express strong dollar ones. That potentially presents an opportunity for a stonger NZD versus AUD.
We now have what looks like a completed wave B with the significant turn down Friday. We’re either headed lower directly in C, or potentially an (x) wave in a larger B. Both call for lower prices near term, and we can hold a bearish view against Thursday’s high. There was no Sustainable Bull reading on RSI, and it appears ready to drop back below the 50 line, which is bearish. This seems to argue in favor of commodity and NZD strength.
Speaking of listening to the market, we won’t ignore the message in USDJPY. The failure below the April high leaves yet another lower high on the chart. No Sustainable Bull reading from daily RSI suggests lower still into an ugly looking wave 5 diagonal, or some other pattern we’ve yet to discern. What’s clear is that the market doesn’t care about the fact that the yen will ultimately become worthless - yet. So, don’t fight that trend, and allow for a small bounce as a bearish opportunity. The prior fourth wave of the wave I rally is either 101 or 94, so even a drop to those levels won’t change the larger yen bearish view - that is, that the USDJPY is going to 150.00-175.00 in its next wave up.
Happy Trading!
The Wolf
We suggested that the 61.8% Fibo level would be helpful to the bearish case if our top count was correct. Indeed, the sharp reversal from that level keeps our top count intact. Now, we can use the wave 2 high as our risk control for both trading, and our top count. Should prices push above the down trendline off the wave ((X)) top, and wave 2 high, we can set aside bearish views for the time being. But, the wave 2 high is really the critical resistance, and given the position of RSI, heading below 50, any early week bounce should prove to be corrective.
Contrary to many beliefs, that a Brexit is bad for the pound, a Brexit may actually be worse news for the euro. Because, if the UK can exit the EU, then other Eurosceptics (like the Five Star movement in Italy, Marie Le Pen in France and the AfD in Germany) will likely gain momentum. For those who own low yielding euro sovereign debt, any significant drop in price (increase in yield) toward Portuguese or Greek levels could be devastating from Friday’s closes:
Germany 0.02%
France 0.39%
Italy 1.38%
Spain 1.42%
Portugal 3.07%
Greece 7.34%
Last week’s failed rally in the pound leaves it under pressure. While we may remain range bound until the coming vote on 6/23, the action up from the wave (3) low is a very clear three wave, corrective rally. Last week saw prices close below two up trendlines and while some support may be found at the longer term broken down trendline, ultimately we’re looking for that to prove to be temporary. RSI confirms our negative outlook.
We thought that wave 2 might be contained by the down trendline, but that was off base. Wave 2 retraced 50% of wave 1, and the only question is if the corrective rally is over. Wave 2 would look better with one more new high, but with Thursday’s reversal and Friday’s follow through, we’re not sure if we’ll get it. Still, there’s only three waves down from the wave 2 label currently, and without overlap of he .7299 level, it’ll be impossible to rule out one more stab higher. Be patient here.
Here too, it seems that we’ll see another push higher prior to a resumption of the down trend. Thursday’s push to a new high was accompanied by a Sustainable Bull reading, which means Friday’s decline is likely a correction that will lead to another wave higher. But, we still see the action up from the low as corrective that will at least lead to a retest of the lows. At this point, only a break of .6834 would eliminate the possibility of further gains.
We continue to think lower in USDCAD, but it’s not with much conviction. The reason is that we could see a range type of environment develop over the coming months to set-up the next big move. So, a larger B wave is possible with prices bottoming not much lower than current levels. Still, the Sustainable Bear readings, and the lack of Sustainable Bull into the wave B top allow for sub-1.2500 to complete C. We’ll reserve a strong opinion, other than to say the current trend is down, and we can argue for one more small down wave at a minimum next week.
Recall the sentiment when oil hit $26/barrel. It was, “the Canadian dollar is doomed on the back of lower commodity prices.” Fast forward a few months, and commodities are the best performing asset class of 2016, so far. It’s now becoming common knowledge that the yen is a “safe haven” rallying when risk markets sell-off. But, have you noticed that the S&P 500 is near all-time highs and the yen has rallied the whole time? So, understand that correlations change.
We’re still looking for one more new low to complete the larger decline, but we may see a larger rally first, since we think wave 5 is an ending diagonal, and therefore wave (v) of 5 should develop in three waves.
Happy Trading!
The Wolf
any new update on euro/usd? waves count analysis
This has been a ridiculous obsession of mine the last couple of months. One technical thing I’m wondering (if anyone can answer it):
What if there’s an obvious wave broken into five waves, but:
- It doesn’t fit the criteria for impulse (eg. wave 4 traces below the top of wave 2)
- It can’t be a diagonal, because it doesn’t fit the precise size order:
Contracting: 1>3>5, 2>4
Expanding: 5>3>1, 4>2
What is it then? Is there a way to account for it without throwing your whole theory in the trash and starting from scratch?
Also, I’m not sure exactly what “Zig-Zag Family” means, as no sources I’ve found have explained it. Does this only refer to a double/triple zig-zag? Or does it mean there can be misc. waves that don’t fit an exact pattern definition, but still resemble zig-zag tendencies? If so, this may account for the waves in question.
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