Why does former resistance become support when prices push above it? And, why does former support become resistance when broken? There is one reason that this “reverse polarity” has ALWAYS been the case – human psychology, which never changes.
The psychology has to do with an overwhelming desire to “take profits rather than losses.” Think about your own trading for instance. Isn’t it much easier to trade out of a position at a small profit rather than a small loss? There’s something about that breakeven level, whether it’s ego or hardwired, that makes taking profits seem easy and losses unpalatable. As a result, when prices return to a former level of trading, you’ll see prices often react to that level as human psychology kicks in.
Let’s see some examples in our Elliott wave forex forecasts.
By the end of the week, EURUSD had only made slight progress, despite the substantial gains seen post-FOMC on Thursday. But, this week saw a significant technical development, the push above a trendline that has contained prices since last year’s decline began. A push above the wave (A) or (W) high at 1.1467 could usher in some near term buying pressure that could see a move to 1.1800 or higher; perhaps on another “kick the can” Greece deal. Recall that the big breakdown level (which is former support, now resistance) surrounds the 1.2000 area. We find it hard to believe that prices will push above that level, but the near term trend is now up.
In the shorter term chart we can see the push above the down trendline and the drop to “retest” the broken line – a very common development. At the very least, we should see a five wave rally similar in length to the wave 1 rally, which would put prices near 1.1550, and at that point we’d probably see significant short covering and the appearance of new bulls. Do also notice that the short term RSI pushed into Sustainable Bull territory into Thursday’s high, and that Friday’s drop held above Sustainable Bear (lower grey zone). That’s bullish action. A break of the wave ii low would likely mean a larger wave 2 was developing, and that would turn us near term neutral. Until then, we’re unabashedly bullish.
The pound is definitely leading the way higher, since it has already pushed above its wave (A) high. Pullbacks should be corrective and hold the up trendline according to the Sustainable Bull RSI reading. We’re looking higher towards the structural resistance around the wave (2) of ((A)) high, which happens to correspond to the 61.8% retracement level in the 1.6200 area. Wave (C) would equal wave (A) at 1.6420 which creates a target zone.
We can also see the Sustainable Bull on the shorter term RSI which keeps the near term trend up. It seems likely that wave (i) was a leading diagonal with a smallish wave (ii), which puts us squarely in wave (iii) of 3 of (C) to the upside. Structural and trendline support should keep prices supported near the 1.5600 area, although we’d be surprised to see prices anywhere near that level. We remain bullish.
We’re sticking with the bearish outlook here, although we do need to allow for a further push higher in B should last week’s high give way. With GBP and EUR looking to push higher versus the dollar, Aussie may have trouble going to new lows directly. Regardless, the Sustainable Bear reading on RSI, and the action since speak to an ongoing bear market.
The action up from the .7600 area looks corrective still, and even a push above .7850 wouldn’t change that. The dividing line between the bearish and alternate counts is last week’s high. A push above there means wave B is still ongoing, in a flat or triangle. Until that happens we can keep a bearish outlook against .7850. If a Greek debt deal is agreed to, that would explain a European currency rally that fails to spark much interest down under. On the other hand if the USD is going to strengthen, the most vulnerable are AUD and NZD.
Despite gains against the USD for most currencies last week, the kiwi continues to languish. The Sustainable Bear readings suggests that’s likely to continue for another week or two at the least. Notice how wave iv failed near the former support from the wave A and wave (b) of B lows, another example of reverse polarity. It’ll take a push above there to turn the longer term trend positive, and that’s not something we’re looking for any time soon.
Looking at the chart, we still have reasons to be bullish:
- Prices broke out of a 5-month base.
- Prices are above trendline and 40-day moving average.
- Action down not speaking of a major trend change.
However, much further downside will start to favor the red alternate. Notice that daily RSI has touched the Sustainable Bear area. Of course, a quick glance at the weekly chart shows that the larger degree timeframe still supports prices. That’s not a reason to ignore bearish evidence, but it’s the reason we’re still favoring the top count.
If prices drop below the 122.00 area we’ll need to consider placing the alternate count into top status. Until then, we’re labeling the decline as shown. A push above the down trendline drawn off the top and the wave (x) label would suggest a push higher in 5 is underway. It is interesting that into a “risk on” environment last week the yen didn’t weaken. That at least speaks to a topping process.
Prices fell hard to start the week, but reversed on Friday near the 61.8% retracement level of the wave 1 rally. That keeps prices pointed higher, with RSI bottoming above the Sustainable Bear level. Also notice that prices bottomed near the up trendline of the base channel. Similar to AUD and NZD perhaps we’ll see some CAD weakness in a “commodity currency decline” theme. We do like the upside in oil next week, but maybe a substantial reversal afterwards.
Similar to AUDUSD last week’s low is the dividing line between bullish and an alternate view. We only have three waves up from the wave 2 low, so we’ll need to see strength to complete five waves from above 1.2218 to keep the bulls on track. A break of that level isn’t enough to turn us bearish, but we’ll move to the sidelines until wave 2, or something more bearish completes.
One reason we don’t rely exclusively on Elliott wave analysis is that when Elliott is wrong, you can fight a trend for way too long. For example, the decline from the wave (i) high appears to be corrective, yet it’s a series of lower lows and lower highs. While we favor the bullish count, it’s no longer clear that the bulls are in control. We have a couple of ways to look for franc strength, and we’ll need to see prices push above the down trenline prior to committing any capital to the bullish view.
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.