The euro put in a big reversal bar on Monday after Italy’s referendum. We’re counting the decline from Friday’s high as a three wave move (see below), and that wave (2) completed on Thursday. You can see it retraced between 38.2% and 50% of wave (1), a much more typical retracement than the small (2) proposed last week. We can count five down from the wave (2) high so look for a small push up to complete 2, and then look out below. Notice how wave (2) tagged the line drawn off the wave W and wave (B) lows. Recall that, a 100% expansion measurement of the rally up from the 2015 low targets .9100.
We’re expecting one last stab higher to complete wave ((4)), but notice that the rally last week failed at structural resistance (horizontal red line). That could be the end of wave ((4)), but if that’s the case, we’ll use the short term up trendline as our key. A break of that would tilt the scales in favor of the idea that wave ((5)) was already underway.
We can’t confirm that wave (iii) is underway, but Thursday’s and Friday’s reversal and follow through bars give us an asymmetric opportunity to be bearish versus the wave (ii) high. RSI is out of Sustainable Bear territory, but meandering below 50 (the neutral line), which we’d expect if a third of a third wave was about to unfold to the downside. We’re aggressively bearish against wave (ii), and even a push past that would have us still looking for a top and turn from below .7600.
Kiwi is in the same spot as Aussie, and we’re aggressively bearish against the wave (ii) high. We had a shooting star pattern on Thursday for a “signal” bar, and Friday’s weak close was the follow through. If the larger count is correct, we could see sub-.6000.
There’s no reason to change our bearish view. After tagging the 50% retracement level of (A), we think wave (B) has topped. An unfolding impulse lower is underway, nearing temporary support near 1.3100. We think the decline to complete 1 will become choppy, though, and if we’re right about AUD and NZD, look out for a deeper wave 2 bounce. A push back above the internal trendline off of the wave (i) low would suggest something else entirely could be unfolding. Until then, the Sustainable Bear reading on RSI suggests we’re on the mark.
The pattern has unfolded as expected with the push to new highs nearly completing wave (iii). Wave (ii) was a deep correction, so wave (iv) should be a sideways type of move to correct via time, rather than price, the wave (iii) blast. We’re not going to stand in the way of the end of wave 1, but we should be a seller of rallies from here on into that high. Notice the Sustainable Bull reading on RSI, which suggests that the next decline will be corrective.
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.