The yen strengthened, as expected, after the triangle pattern was complete. While the bounce in wave (e) was towards the upper extreme, the bounce was a gift for the bears. Such a move is why the triangle is The Wolf’s favorite pattern. It has a defined, small risk level, the wave (c) high, and a big payoff relative to that risk.
Unfortunately, prices bottomed sharply, after failing to reach the objective to the downside (keep this in mind when looking at EURUSD below). Now, the question is, “will we get one more wave down to complete wave 5, or is it complete in an awkward manner?” The 112.33 area seems to hold the key, as that would create internal overlap and push prices above the sharp down trendline. But, only a move back above the wave 1 low would cement the idea that prices are headed much, much higher.
“Don’t fight the Fed” seems to be everyone’s mantra in the US, but we’d argue that it goes doubly for the BOJ. The Japanese have a culture that is loathe to admit defeat, so do you think the BOJ is going to do anything other than monetize, NIRP and helicopter drop money? At 240% debt-to-GDP, its “inflate or die” for Japan and the BOJ. We’ve mentioned before, our fund manager friend’s target of infinity for USDJPY, and believe me, that’s not because of his fondness for the USD. Instead, he believes, as I do, that the yen will end up hyper-inflating. If our top count is correct, USDJPY will be above 150.00 sometime next year.
One last thing to point out is that the positive USDJPY correlation with risk assets has broken down. Notice that the past month or so has seen a dramatic bounce in the S&P, yet not so for USDJPY. So, a major rally in USDJPY doesn’t have to mean that risk assets also go up.
Prices rallied as expected to above last week’s high, and are now testing the triangle’s upper boundary. We see one more small wave up to complete wave C, as long as prices remain above 1.1205. A drop below there would suggest that the triangle is complete, and a thrust towards parity was underway.
Of course, given that the Fed is reluctant to raise rates further, no policy divergence is going to push the euro down. Instead, Brexit or other European negatives are likely to be the proximate cause. But, remember that triangles are the final pattern before terminal thrusts. As such, a brush with parity might be short lived. So, don’t be sellers on the break, instead, look to sell while in the consolidation, and be flat towards parity.
A push towards 1.1600 is unlikely to change the ultimate resolution here (which is lower), but it would potentially alter the way we label the bearish consolidation since March ’15. The point is, be skeptical of further rallies here.
Here we’re showing the 240-minute view of GBPUSD to highlight the importance of the wave 1/A high. We can see clearly the three wave move for wave (b) of 2/B, and we’re now close to the wave 3/C top. That setback will set the stage for the next big move. Despite suggesting the count to the downside was complete last week, the market does have other options to get to new lows. The only way that’s going to happen near term though, is by breaking 1.4284, and we’d get bearish below that, potentially looking for a dramatic spike down.
Wave 3 reached the 1.618% distance of wave 1 this week, and reversed shortly after. That likely means a sideways correction for wave 4 is underway, and either late this coming week, or early the following we should be looking to position bullish for wave 5. While our top count suggests this is the first wave of an upward correction, the alternate does suggest that wave ((X)) is tracing out as an expanded flat. Both call for five waves up from the low, so it doesn’t matter what we consider ourselves longer term, both patterns allow for the same path near term.
Unlike AUDUSD, NZDUSD continues to act bearish. We’re aggressively bearish against Friday’s high, since prices still haven’t registered a Sustainable Bull reading into this rally, and they remain below recent highs. While AUDUSD goes through its sideways correction, we can look for a significant decline in NZDUSD, especially if our top count is correct. We do see a technical pattern called a “wedge” which suggests that the entire rally since January will be completely retraced, and yields a target of .5825, a new low.
We can see the five wave decline from the high, which means two things: 1. The trend has changed, and 2. A corrective rally is about to begin. In addition, a huge support is just under prices, where wave (3) topped back in March of last year, and where prices bottomed in wave 4. So, we’re going to loo for prices to return towards the 1.3650 area, although we do prefer looking for NZD weakness than we do CAD.
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.