Last week’s title was dead on, “Euro to Follow the Pound.” The breakdown from the triangle happened on Tuesday, and it was straight down from there, likely completing wave (i). A small bounce may develop in wave (ii), but remember what we cautioned several weeks ago. This triangle has been so long in development, that the break out of it may happen more or less in a straight line.
We’ve been waiting for significantly bearish news out of Europe for a long time now, and even though we don’t buy into “policy divergence” as a way for USD to strengthen, that’s certainly a possibility, especially if we get news that the banking system is going to require ECB or state sponsored support. Notice the Sustainable Bear reading (lower grey zone) on RSI late in the week. This tells us any bounce should be corrective and rully retraced. A drop below the 1.09 area means the next structural support is 1.05. We’re still expecting a move below parity.
If our euro count is correct, it makes sense that the pound would start the week with some strength too. We’ll look for more of a “time” correction than significantly higher prices, and the trendline should be resistance. Even a break above that level, though, is unlikely to change the larger psychology on the pound.
I had a conversation with a colleague this week about the pound’s “fundamental” value, as opposed to the technical action. My response was that psychology was the only “fundamental” that really mattered. George Soros refers to this concept as “reflexivity,” or market participants actions in the marketplace influencing the direction, and therefore causing “fundamental” reactions. It’s the old story that the “market makes the news” not the other way around. Given the still Sustainable Bear readings, even after a big bounce, the upside action should be fully retraced before a final low. A market forecasting friend has a 9-year cycle low count for the pound in February 2017, and that sounds about right to me.
As traders, sometimes the best trade is not to trade. That sums up my feeling here. Our top count is bearish, but Thursday’s bullish reversal from trendline support leaves the alternate as equally likely. It’ll take a drop below the up trendline to suggest our top count has better than even odds of success.
Unlike it’s commodity currency brother the Aussie, NZDUSD looks much clearer. In fact, we suggested it would find support at the up trendline, and now we’re looking for the down trendline to halt the rally sometime this week. A drop below the up trendline will complete the wave (iii) decline, but ultimately we should see lower prices before a more lasting bounce. The Sustainable Bear reading confirms this view.
It’s been a long time since we’ve had something constructive to say about USDCAD. But, Friday’s action confirmed Thursday’s key reversal pattern, and gives the bears something to work with. We now have a potentially completed upside corrective pattern, after a clear five down for wave (A) off the January 2016 high. We’re now looking for an impulsive move down that may find temporary support at the up trendline off the wave (A) low. A move towards 1.2000 may be underway. Of course, this doesn’t concur with our NZD count, but may be the reason that our AUD count is in question. Potential commodity strength (especially oil) would seem to make sense if our USDCAD count is correct. The recent consolidation in oil does point upward to the low $60s, potentially.
Notice that the USDJPY still hasn’t registered a Sustainable Bull reading since the “Brexit” low. Is that what you’d expect if indeed wave III up had started? No. While prices have pushed above short term resistance, they’re still below several down trendlines and structural resistance. We’re not going to abandon our call for one final new low unless prices show evidence that’s convincing. Be patient, as both counts remain on the table.
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.