As recently as March, many were calling for parity for the EURUSD. One Forbes article stated, “Like a hot knife through butter, the EUR has managed to penetrate its long-term medium target with ease (€1.0762). It’s near impossible to stop a runaway train…” While the Forbes article wasn’t making a direct forecast, it reflected sentiment near a substantial low with the comment, “there is technically no support of note ahead of the February 2003 low of €1.0665.” Where are the calls for parity now?
In contrast to those calls for parity, near the EURUSD low, we were saying:
The euro refuses to stage any rally at all. In fact, most participants have become extreme in their thinking: Greece will exit the EU causing banking failures, deflation has ensnared the ECB and the US has “policy divergence.”
Here’s the thing though, each and every one of those thoughts was also true six months ago when the euro traded near 1.40 to the dollar. So, what’s changed? The perception has, not the reality. I concur that Greece will eventually default and cause a banking crisis in the EU, and that deflationary pressures exist in the EU. I do not agree that the US will have much of a policy divergence though the appearance of one exits today. Certainly, there’s the idea that the Fed will raise rates in June, and it almost has to move to .25% on Fed Funds to retain any credibility at all. But, I believe that the US economy is so weak that rates are unlikely to rise much after that, perhaps staying at .25 or .50 for another 12-18 months.
And, even if I’m wrong, the charts don’t lie, five waves down are nearing completion at several degrees, so even a small decline or consolidation for the dollar is due. Let’s take a look at our Elliott wave currency forecasts, starting with a daily chart of the EURUSD.
The reason we point this out is not to pat ourselves on the back. It’s to alert you to what will be said near the wave ((B)) top. Get ready for the “US economy isn’t that strong,” “ECB solves Greece,” etc., etc. The reality is that we see another big wave of EURUSD selling coming AFTER a push towards 1.1800 or so.
As usual, we’ll take our direction from the charts. Here’s our Elliott wave currency forecasts.
Last week we were unsure whether wave (B)/(X) would become more complex – not so this week. In fact, we’re super bullish heading into next week, which does suggest some sort of deal on Greece, perhaps. Here’s what we see:
- A three wave decline for (B)/(X) retraced 61.8% of the wave (A)/(W) rally.
- A five wave rally for 1 pushed past the wave B high, cited last week as the level where the bullish count was best.
- A clear three wave decline for wave 2 (see chart below).
- A clear five wave rally for (i).
- Daily RSI into Sustainable Bull territory into the wave (A)/(W) top.
- Daily RSI remains in Bull Support (lower blue zone) at the wave (B)/(X) low – above Sustainable Bear (lower grey zone).
Prices are at natural resistance with the apex of the prior wave 4 triangle, long term down trendline and wave (A)/(W) top. A push above those levels next week will turn sentiment bullish and allow for a further rally up towards the 38.2% retracement of the decline since last summer’s top, which is around the 1.1800 level. This is an almost perfect set-up for a longer term swing trade.
Here we can see the internals for wave 1 and 2. In addition, we can see five waves up for wave (i). Now, the internals for wave (ii) aren’t clear, but we can see that both waves 2 and (ii) retraced approximately 61.8% of their respective wave ones. We are aggressively bullish against the wave (ii) low, since the turn up from it was almost vertical, and therefore likely a resumption of the uptrend. A push through 1.1400 will likely turn many traders bullish.
Wednesday’s rally left little doubt about the near term trend. While prices are still below the wave B high, it’s still possible for a bearish outcome, but it seems the top count is on track for now. A break of the up trendline would caution bullish traders. Notice the behavior of RSI, which really tilts the scales in favor of the bullish outcome. It’s essentially the same story as in EURUSD, Sustainable Bull followed by a hold in Bull Support (above Sustainable Bear). This proprietary concept allows us to clarify and rank Elliott counts by probability. Some say that there are too many possibilities in Elliott, and sometimes an unclear start to a rally (like 1 and 2 after (B)’s low) can be a hindrance. But, there’s nothing like the clarity Elliott can provide in a situation like EURUSD above.
Here we’re showing the five wave rally for wave 1 followed by an expanded flat for wave 2 which retraced almost 100% of the wave 1 rally. In addition, wave (b) failed to push above the wave A low, which allowed for further price declines. However, the rally above the down trendline leaves the near term trend up and in a possibly powerful wave 3 of (C) rally. Also, notice that the wave (B) decline held support at the wave 4 low, which means we still have a series of higher lows.
Aussie failed to reach a new low beneath the wave (iii) bottom, so it’s possible that the larger trend is still lower. However, there’s significant support which we’ve seen time and again near the .7600 area, and with EUR and GBP looking to rally, it’s possible that we need another wave higher to test .8000 again prior to a break of support. We see nothing here from a swing trade basis for next week, and even the internals on the shorter term charts show us nothing of significance. Look elsewhere.
We wrote last week, “Prices should remain beneath the down trendline, although critical resistance for the bearish case is the wave (i) low.” Sure enough kiwi failed just below the down trendline along with structural resistance from the wave A and (b) lows earlier this year. That keeps the top count on track despite the bullish divergences. The latest bullish divergence comes from just above Sustainable Bear territory, so it warns of the wave (iv) bounce, which does fit with a bullish week for EUR and GBP. We’ll look for one more final low to complete the five wave decline from the wave B top, but a push above the red line will warn that the low is in place. A push above critical resistance from the wave (i) low, means a much larger advance may already be underway.
Last week we were reluctant to call the top, although we weren’t bulls because, “we can now count five waves up from the wave 2 (or (4) low).” Last week’s collapse fit our scenario, and you’ll notice that at the low, prices came very near the wave B of (4) peak, in a retest of the breakout level. We still think the top count is best, which is supported by the Sustainable Bull RSI reading into the top, even though there was a slight divergence.
The Sustainable Bull reading doesn’t mean the pair hasn’t topped, only that odds suggest another new high is coming. Based on a study completed by Laszlo, the odds of a new high (or at least a test of the high) after a Sustainable Bull reading are in the neighborhood of 87%.
Here we can see the three wave decline for wave 4 which has retraced nearly 50% of the wave 3 advance. Given that the wave 2 decline was deep, wave 4 should be shallow to alternate. So, a decline beneath the 50% retracement shouldn’t be seen, and that would be a warning that the red count was best. A push above the wave (b) high at 124.62 would likely mean that wave 5 was underway.
Prices found structural support last week, although the bounce on Thursday and Friday was lackluster. Also, notice that into the wave 1 top, RSI was unable to reach the Sustainable Bull zone. The pullback appears to be corrective, and we’re looking for a rally, but we’d rather see some evidence that the pair has bottomed.
Here too, it looks like the decline from the wave 1 high is corrective, although as you can see, prices up from the wave 2 low isn’t an impulse. We can’t rule out one more decline to complete wave 2, or perhaps something more bearish (like a larger wave (4)). We’re going to await clarification here. Is it possible that EURUSD & GBPUSD will see substantial rallies, but USDCAD & USDJPY will rally too. If that’s the case, there seems to be opportunity in the cross rates of the European crosses versus JPY and CAD.
It seems that traders are divided on the direction of the Swiss franc. That can be seen in the behavior of RSI which went back and forth between Sustainable Bull and Bear, to be followed by a narrower range lately. While the count calls for another push higher, there’s nothing implusive to the upside in wave (iii) yet. As such, allow for additional downside early in the week, and await a clear upside reversal before getting involved.
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.