Mark Twain quote: It ain't what you don't know that gets you into trouble. It's what you know for sure that just ain't so

Creating Inflation & Elliott Wave Currency Counts

“It ain’t what you don’t know that gets you into trouble. It’s what you know for sure that just ain’t so.” Mark Twain

This week the Federal Reserve’s mouthpiece at the Wall Street Journal John Hilsenrath penned a letter questioning, with an almost baffled tone, why people aren’t freely spending money. While I could write a list of reasons why they aren’t (See March ’09-present paragraph “problems on Main Street.”), suffice it to say that the economy isn’t nearly as good as those holed up in their ivory towers assume. And why is that?

Let’s look at one aspect of the Fed’s monetary policy to see just how backwards some economics PhD’s can get the topic. The idea behind the Fed taking the Fed Funds rate to 0% over six years ago was two fold: 1. that people will have lower interest payments, and as such, will be able to buy homes, cars and more consumer goods; and 2. that inflation will appear making debt easier to carry. Here’s the catch, though. By keeping interest rates too low, it actually encourages overproduction, which means prices fall – the exact opposite of the situation the Fed intends to engender.

Here’s an example. Over the past six years, businesses have done quite a bit of borrowing, especially oil and gas explorers. By keeping rates artificially low, it incented borrowing for exploration, which created an oversupply of oil and gas. Hence prices fell.

What the Fed should recognize is that by trying to solve one problem, it creates unintended consequences (rates too low in 2004 led to the housing bubble). In fact, every move the Federal Reserve makes is an artificial one that runs contrary to the signal generated by the free market. By definition, the Fed can’t actually produce anything of value, because everything it does runs contrary to the signals that producers need. I’m not one to say that the free market never gets things wrong, or that prices are always right, but at least free markets aren’t destined to fail.

Remember, it’s not what we don’t know that gets us into trouble, it’s false beliefs that do. Now, on to our Elliott wave currency forecasts.


EURUSD daily chart
Reversal From Below Trendline Keeps Range Intact

Prices rallied sharply early in the week, but were unable to hold those gains. The failure from below the trendline leaves the possibility open for a decline to complete wave C of (B) or (X), prior to the next rally wave. Notice that daily RSI failed to reach into Sustainable Bull territory, which suggests a trendless market.

EURUSD 120-minute chart
A Clear 3 Down for A

We can see the clear three wave decline for wave A, or its alternate (B). Either way, the three wave decline means that the one larger trend is higher. One could argue that the rally up from the wave A low is a five, so we do have an alternate count that suggests it’s 1 of (C) to the upside. But, the top count is still leaning on a deeper decline to complete wave C of (B). That will be the case as long as prices don’t eclipse 1.1280. A push above that level will leave a three wave decline and that would likely mean a powerful move up in wave 3 of (C) was ready to take EURUSD up towards the 1.1500 area.


GBPUSD daily chart
Rally Fails at Key Level

We knew something was wrong with GBPUSD on Thursday when it couldn’t push past the wave A low, and was underperforming. We sent a Tweet out that pointed out that failure, and if you’re not following us on Twitter, @TraderSkillSet, you should be. That’s a great way to get our latest thoughts and interact with us. We’re sticking with the idea that the decline from 1.5809 is a correction, but we’re a break below this week’s low and one could argue that we’ve seen five down. We’re going to need to see some evidence before getting too bulled up here.

GBPUSD 120-minute chart
Near Term Trend is Down, Until the Trendline Breaks

Short term RSI pushed into Sustainable Bull territory, but prices weren’t able to push above the down trendline drawn off the recent highs. The fact that structural resistance held, with no overlap of the wave A low, means the bulls are in trouble near term. Allow prices to show us what they want to do, because the action is a bit sloppy now. A push above the trendline in an impulsive manner, and a small corrective set back would at least allow us to look for a bullish trade.


AUDUSD daily chart
Support Likely to Give Way

The rally to start the week was sharp, but the Sustainable Bear RSI reading, after the bearish divergence into the wave B top, was a tell that the rally wasn’t sustainable. That didn’t make it easy to turn bearish, although the failure below the wave (i) low likely keeps the top count on track. Since there are only three waves down from the suspected wave B high, it’s possible that the decline is only wave (b) of B with a small rally wave to push up towards .8000. But, that’ll remain the alternate unless last week’s high is taken out. Until then, we can look for an early week small corrective bounce to turn bearish for a break of support. We’re not confident that there will be a tremendous amount of downside follow through, but lower seems likely.

AUDUSD 120-minute chart
An Expanded Flat For Wave (iv)

You’ll notice the push into Sustainable Bull on the smaller timeframe with last week’s rally. Here’s where multiple time frame coordination comes into play. Even though the 120-minute push registered bullish RSI, the larger timeframe didn’t. It’s when two timeframes agree that we can be confident of a signal. We are bearish against the wave (iv) high, although realistically prices shouldn’t push past Friday’s high under the bearish view.


NZDUSD daily chart
New Low Achieved, Lower Still to Come

The top count remains on track for the bird. RSI is in Sustainable Bear, although a slight bullish divergence suggests a temporary, wave iii low is close at hand. Prices should remain beneath the down trendline, although critical resistance for the bearish case is the wave (i) low. It’s too early to think about a bottom here, but we wonder how far off it is. Perhaps, we’ll see an ending diagonal for wave (v) which will keep the downside limited. Regardless, there’s no near term structural support to speak of, and keep in mind that wave (ii) was sharp, so wave (iv) should be a sideways correction according to the guideline of alternation.


USDJPY daily chart
Uptrend Intact, Top Imminent?

The Wolf wrote professionally as an analyst for years. As an analyst it’s easy to count five waves and call a top. As a trader, it’s more difficult to make money on such moves. For instance, we’ve been bullish since the wave (a) of E of (4) low, against the wave C of (4) low. But, it hasn’t been “easy” to make money. Yes, we’d like to send a bouquet to the dynamic currency destruction duo of Abe and Kuroda, but when capital is on the line it’s always a challenge.

We point this out because while we can now count five waves up from the wave 2 (or (4) low), there’s no reason to turn bearish. Yes, we could stick the wave 3 (or red 5) at the top now, but check out daily RSI in Sustainable Bull.

USDJPY 120-minute chart
Watch for wave 4, Support at 123.75

In addition, notice that shorter term RSI is sending the same bullish signal. That means any decline should be a correction. Regardless, with prices so far extended from the breakout, not to mention the wave 2 low, we had no desire to sit with an overnight position. While we remain long term yen bears, there’s now a greater risk of a larger pullback in USDJPY, now that the rally appears fully formed from the all-time low. In addition, there’s now some chatter out of Japan that the yen may already have been “weak enough.” We’d like to turn bullish into a corrective decline for a trade, but at this point we’re not going to force anything. The set-up will have to be clean.


USDCAD daily chart
Holding Gains, Above Resistance

The wave 2 correction has become a bit more complex, but the five wave rally up from the wave (4) low is awfully clear. Similar to AUD and NZD we’re bullish USD against these “commodity” currencies. Daily RSI was unable to push into Sustainable Bull into the wave 1 peak, which fits with a deeper pullback for wave 2. We’re looking for support to hold, though and launch another push higher.

USDCAD 120-minute chart
Looking for a Completed Correction Down

Here we see the clear five wave rally for wave 1 which channels nicely. In addition, we can see two different three wave moves to new highs, one for wave b of (a) and the other for wave (b) of 2, which mean the one larger degree trend is still down. We’ll look for support in the 1.2300-1.2367 area to hold, and an upside reversal to launch another big wave up. Perhaps that says something for oil (i.e. lower), natural gas (which is already near its lows) and other commodities.


USDCHF daily chart
Still Looking for a Turn Higher

Similar to USDCAD, we’re looking for a turn higher. But, the bounce from the wave (ii) low is only in three waves, so a decline to complete wave (ii) is still possible. In addition, there’s an awful lot of overhead resistance, unlike the other pairs. That’s not a reason to completely dismiss the upside here, though, especially since many may not be positioned for franc weakness. Should prices push above the wave (i) high, many traders may scramble to cover shorts and become new longs.

Happy Trading!

The Wolf

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.

About The Wolf

Twenty years is a long time to be involved in the trading business. Through many battles in every asset class known to man, knowledge has been gained; and, this project is a way to share that knowledge. The Wolf is a big fan of repeatable market work, or the creation of a “process.”

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