From December 12th to the 18th, the NZDUSD sold off over 400 pips. Is this just a correction in larger degree bull trend or is this the beginning of a much larger downtrend? We examine the wave pattern as well as recent COT data in order to arrive at an answer.
This has actually been our alternate count for the NZDUSD but the count is gaining traction. Last week’s COT report indicates that the USD could top as speculators are extremely long and hedgers extremely short and that the NZDUSD is likely to bottom since hedgers are extremely long and speculators extremely short. This would be bullish for NZDUSD of course and would support this count; which has an ending diagonal unfolding in the 5th wave within a 5 wave bull cycle from .6639.
This has been our favored count for the last number of weeks. The 5 wave rally may have ended at .7891. In this case, an expanded flat is unfolding and wave C needs to come under .7435 before the pattern can be considered complete. Zooming in on the NZDUSD 60 minute chart supports this count as the decline from .7937 can be counted as 5 waves.
As mentioned, the decline from .7937 can be counted as a 5 wave decline; and maybe wave 1 of C. The current rally then is wave 2 of C and should end in the Fibonacci reversal zone (.7671-.7773) before wave 3 of C results in a larger NZDUSD drop.
The chart above is of the NZDUSD weekly chart and indicators that are derived from COT data. The top red line measures the commercial hedger bullishness. The second red line measures speculator bullishness. The blue line is a combination of speculative and commercial hedger positioning. Strong buy signals occur when the top red line is near 100, the second red line near 0, and the blue line near 0. This indicates that commercial demand is strong and that speculative demand is weak. At market turns, speculators are wrong and commercial hedgers correct. Notice that NZDUSD market lows occur when the top red line peaks, the second red line bottoms and the blue line bottoms.
[B]Summary:[/B]
Both bulls and bears have a solid argument right now. If an ending diagonal is unfolding, then the rally will probably be somewhat choppy from here and a sharp reversal lower would be expected soon after price exceeds .7937. If the expanded flat count is correct, then a reversal should occur near the 61.8% retrace level at .7773. Given the sentiment backdrop as illustrated through the COT data, we favor the upside and expect price to exceed .7937 and possibly .8108 in early 2008.
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