Trend Reversal Thermometer
[B]Percentage Likelihood of a Top: 88%
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We wrote on 02/07 that USD/CAD has been sitting at its 1 year high for the past week leading many traders to wonder if this is a major top in the making. Our Trend Reversal Thermometer currently puts the chances of a top at 70%. The Elliott Wave structures at multiple degrees suggest that the USDCAD is nearing a major top. There is a good chance that the pair will make one more high (above 1.1870) to complete an ending diagonal. 1.1886 is a measured objective for the terminus of the rally from 1.1028 (and ultimately 1.0927). A break below 1.1646 signals the resumption of the long term downtrend.
Last week we said, The 5th wave of the c wave is unfolding as an ending diagonal. If this interpretation is correct, then price should exceed 1.1870 once more before turning lower for good. The decline that followed the top at 1.1879 has unfolded in 5 waves (red roman numerals). This small degree 5 wave decline is just the first in what will be a 5 wave bearish sequence that will likely take the USDCAD to below 1.0927. The small wave 2 corrective advance we saw completed yesterday has given way to major declines from the 38.2% fibo of 1.1879-1.1620 at 1.1719. Additionally, risk reversals have entered an extreme level, which has boosted our thermometer reading. As we have said before, wave 3s are usually the most powerful waves and can take price a long way in a short period of time, so get ready!
Key to Understanding the Trend Reversal Checklist for the Thermometer
The Percentage likelihood of a top or bottom associated with the Thermometer is calculated based upon weighting the 7 components in the checklist.
JPercentile (20%): Price is valued as a percentile, measured against the last 21 days (roughly 1 month of trading) for intermediate tops and 52 weeks (1 year) for major tops. Probability increases that the pair is nearing a short term top when the JPC indicator reads 100%. A reading of 0% indicates the potential for a bottom. Every top has a reading of 100% but not every reading of 100% is a top. Besides the percent reading we also need to see a turn out of the extreme level (ie. If it reaches 100%, we need to have it pointing downwards and vice versa) to determine whether this is a top or bottom. The box is only checked when we see a turn off of extreme levels in the JPercentile reading.
Elliott Wave (20%): Standard Elliott Wave Theory, the box is checked when we see a possible 5 waves complete or 3 waves complete (correction).
Significant Support or Resistance Levels (16%): The box is checked if we have important monthly pivots, or Fibonacci levels capping gains in topping scenarios or providing a support in bottoming scenarios
Volatility (16%): The box is checked if the currency pair has a volatility level below 8%. If a currency pair has a volatility that is too high, then it has a greater likelihood of experiencing swings that may not be as conducive for top or bottom picking because the potential of spikes could cause stops to be taken out prematurely.
Statistical Significance (12%): This box is checked if the move has extended with no retracements for a statistically significant amount of days (ie. 8 straight days of gains or 10 straight days of losses which is quite rare)
Risk Reversals (16%): At the money 25 delta risk reversal positioning tends to be at extreme right before the market turns. This box is checked if that is the case.