Five waves up are complete for wave A, after a three wave decline for (D). We’ll look for an early week corrective decline to be followed by strength up towards the key 1.1080 pivot. After that it’s either chaos in Europe, or a resumption of policy divergence in the US that leads EURUSD to, and below, parity.
We nailed the call for an “early week low followed by a bounce,” although the extent of the bounce surprised a bit. We’re still beneath key resistance, which is the wave 1 low, though. A rally past there would leave us wondering if a more significant low has been struck. However, our daily RSI study, which shows a Sustainable Bear reading into the most recent low, suggests the current rally is corrective, and at the very least a sizable downward retracement will be seen. We’re looking for downside reversal action to reenter bearish ideas.
Prices exploded higher this week, pushing past prior highs seen in October, December and January (orange line). However, they remain below prior lows which are still resistance from early 2015 (yellow line). Should prices rise above the red base channel, we can assume this rally is firmly entrenched despite the overhead resistance and daily Sustainable Bear readings into the low. Should prices fall back below the red line, though, we’ll look to turn aggressively bearish, especially if prices break the up trendline off the low, although that seems to be a discussion for future weeks.
Same story here in kiwi, although prices still remain below similar levels in AUDUSD. Until prices eclipse the October and December highs, it’s a bearish divergence, which doesn’t bode well for NZDUSD. So, we’ll look to be more aggressive on a downside reversal here, especially given the lack of a Sustainable Bull reading on RSI. Wait for a clear downside reversal bar, which shows a five down three up sequence.
The recent CAD bulls will abandon their stance on the first sign of a turn higher in USDCAD. Given that prices are into support, and we can count five waves down nearly complete, we’ll be looking to turn bullish early in the week here. While the near term trend is down strongly, the weakness in the Canadian economy, on the back of commodity weakness (not to mention its inane central bank abandoning gold) has much room to run. Such fundamental justification isn’t needed, all we need to know is that after a five wave move, a counter trend correction follows – in this case wave B up.
Several technical clues suggest not only upcoming yen strength/USDJPY weakness, but also a terrific risk/reward set up. First, wave 2 of (C) was a sharp correction, which means wave 4 should be a flat or triangle by the guideline of alternation. In addition, the wave 1 low shouldn’t be violated if our top count is correct. And, we have significant structural resistance at the red horizontal line, along with a head and shoulders top that points lower towards 106.00. So far, wave 4 looks like a flat correction, which shouldn’t exceed the wave 1 low, nor the wave (a) of 4 by much. Since we have defined resistance at 115.97, and our 100% range expansion of wave 4 points to 107.07 (and our head and shoulders target just below 106) we can turn bearish here very shortly.
While we hate the yen, BOJ and Abenomics with all our heart and soul, such a set up is too good to pass up. Perhaps a decline into 106 will allow us to roll some profits into some super long term yen puts.
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.