As the Euro Churns: Elliott Wave Edition

As the Euro Churns: Elliott Wave Edition

A fund manager friend of ours is fond of saying that European politics has always been dysfunctional, and it will always continue to be. After last week’s dramatic OXI vote from Greek citizens, the euro was sold reflexively, without regard to the euro being a stronger currency without its weakest link – Greece. With the late week rumor of a potential deal on the table, however, EURUSD regained some key ground.

But, regardless of what happens with Greece, two things are clear for the direction of the US dollar. First, while the Fed may raise 25 bps in September, its “dot plot” is going to show lower for longer. Like we’ve said before, if the Fed couldn’t justify raising rates when the Taylor rule suggested Fed Funds should be at 4%, is it really going to raise aggressively now that Taylor rule inputs are deteriorating (Even though it says 2.34% is appropriate)? Second, Germany’s economy is at least as strong as the US, and Germany should be much more important for the value of the euro than Greece, given that Germany’s economy is 16 times the size of Greece’s.

Anyway, we’ll continue to focus on our Elliott waves and other technical clues for our currency forecasts.

EURUSD

EURUSD daily chart
One Trendline is About to Give Way

You’ll notice that we’ve altered the labeling of the rally up from the 1.08 May low. It reflects that the current up move is expected to be only a three wave move for (Y), where prior we were showing both (Y) or (C) as equally likely. We’re still sticking with a bullish view, and it’s still possible that (C) up is going to happen, but this better reflects our take of a limited rally towards 1.16-1.18. Now, a (Y) rally has implications for the May top, which is now (W) rather than (W) or (A), and that May low is (X) rather than (X) or (B). While this is a bit of inside baseball (or inside Elliott if you prefer), it helps set the proper expectations.

Other than Elliott, daily RSI action still supports a bullish outcome. We wouldn’t be surprised to see a violent rally given the general sentiment that the euro is doomed because of Greece, and RSI holding above the “Sustainable Bear” zone supports our Elliott view. That doesn’t mean we’re 100% correct, it’s more like 65%. Still, it’s enough to continue to sit with our contrarian view.

We still are showing an alternate count, in this case that the entire rally up from the March low is a ((B)) wave triangle rather than double three. The Alt count shows waves (A), (B) and (C) of that triangle with the (D) in red. The important point here is that we don’t want to fight any weakness on a break of last week’s low, since a thrust down from a triangle will be taking place. As we’ve seen with USDJPY, thrusts from triangles can be forceful “one wave” type moves with very little backing and filling.

EURUSD 240-minute chart
Teetering on a Break

We are using the wave (ii) low as critical support for our bullish outlook. A break of that level, and especially last week’s low would tip odds in favor of the bearish view. Early week action is likely to be important for the broader view.

GBPUSD

GBPUSD daily chart
Collapses, Then Finds Support

The late week rally rescued the pound from above the June low. Here too, action since the wave (A) high does have the look of a triangle. While we can force the rally up from A to count as a five, the reality is that it looks too choppy internally to be an impulse. More importantly is the behavior of daily RSI which held once again above Sustainable Bear territory (lower grey zone). A break of the trendline and last week’s low would tilt the scales in favor of the alternate.

GBPUSD 240-minute chart
Corrections Abound

Here you can see the corrective looking action since the wave (A) top. The fall from the wave B high is also corrective so far. A push back above the wave (a) low is needed to create overlap and set the bulls at ease. Until then, a sharp turn back down below last week’s low would turn the decline into a five. That’s not to say that would be the nail in the coffin, (since wave (B) could be an expanded flat, but we’d need to see impulsive action back up before getting excited about bullish prospects again.

AUDUSD

AUDUSD daily chart
Bears in Full Control

We’ve been correctly bearish here, although we altered the internals of wave C slightly. The way we had labeled the decline from the wave B high in last week’s update was that of a wave (v) down. But, remember that wave (iii) can never be the shortest wave, and with the size of last week’s decline it was. So, we’re continuing to look lower here per the top count and daily RSI.

AUDUSD 240-minute chart
A Correction Up From Last Week’s Low

The wave .iv of iii rally traveled 124 pips. That means a 100% expansion target for that rally yields a target of .7248, which is a very reasonable target given the action. Notice that the shorter term RSI, while diverging into the low, turned back down right near the 50 area. That keeps the Aussie pointed lower, and only a rally back above the .7600 level would suggest something less bearish was underway.

NZDUSD

NZDUSD daily chart
Bounce Due, Trend Down

Kiwi has reached the 100% range expansion target of the wave B rally, which cautions that a bounce is likely. Sure enough, the late week rally appears to be a small five wave move, which allows for further upside in wave (iv) prior to the final low. Here’s where we may see volatility increase with a spike to complete (iv), and then a spike to the wave C bottom. RSI shows no sign that something more bullish is developing, though, and it really would take a rally back above the wave A low to suggest the decline was complete.

USDJPY

USDJPY daily chart
Action Down Overlaps,
Is Corrective, Though

Last week’s overlap of the wave 1 high did enough to technically bury the bullish view. However, prices promptly reversed powerfully, so we’ve left the top view in place, for now. That doesn’t mean we’re endorsing the bullish view here, as it’s more 50/50 as to which count is correct. In fact, we may be looking at a wave (B) rally here in a much larger flat correction of the entire rally up from the all-time low. We’re not looking for bullish opportunities given that the return to the broken up trendline may just be a good-bye kiss. Daily RSI reached into “Sustainable Bear” territory, which adds further uncertainty to the near term picture.

Whenever Elliott offers opposing views, we default to our RSI studies. Whenever our RSI study shows diverging views, we’ll move to the larger timeframe, or simply rely on signals. In this case we have a bullish reversal and follow through day which allow for a further rally. Another possibility is that wave 4 is tracing our yet another triangle. We’ll remain nimble and let you know if we see something actionable.

USDCAD

USDCAD daily chart
Bullish View on Track

Similar to Aussie and Kiwi this commodity currency looks poised to weaken further. Our top view has been bullish, and it will continue to be unless we see prices fall back below the wave (i) high. An earlier sign that the bullish view wasn’t correct would be a drop below the red up trendline. Notice that daily RSI has reached the Sustainable Bull zone, though, and that suggests any decline is likely to be corrective. Look for opportunities to join the bulls.

USDCHF

USDCHF daily chart
Which Way is Anybody’s Guess

There’s really nothing to say here about USDCHF. Action up from the suspected wave (ii) low is choppy and overlapped, the signature of a correction, so we might be dealing with a leading diagonal, but we might not. Daily RSI’s last signal was Sustainable Bear, although it showed three contradictory signals prior to that. So, both Elliott and RSI are up in the air right now. Allow for prices to clear before making a call either way.

Happy Trading!

The Wolf

The time zone we reference on our charts is Pacific Standard Time. Therefore, the U.S. cash market opens at 6:30 AM PST and closes at 1:00 PM PST.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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