Not Exactly a “Great Fall” But…

If our Elliott wave currency forecasts are correct, look for more chatter about the Fed leaving rates alone in September. It’s long been our contention that the Fed really doesn’t care about serial bubble blowing or normalizing policy. If it did, it could have raised rates by a measly 25 bps by now, considering the Taylor rule suggests a 2% rate is currently appropriate.

While one must be careful in extrapolating too much, certainly the USD higher on economic strength meme seems to be losing quite a few global underpinnings – whether it’s China, Southern Europe, weak corporate revenue growth or rising junk bond rates. We’re looking for another couple of weeks of USD weakness per our top counts, at a minimum.

Let’s turn to the charts.

EURUSD

EURUSD daily chart
Euro Rallies As Expected

Prices gained traction in favor of our top count this last week, slicing through down trendline and some structural resistance from the wave (i) high and 1.1050 area which has acted as an important support/resistance level since back in January. The top count calls for a push above the wave (W) high in five waves for C of (Y) towards 1.1600. Prices need to remain above the broken down trendlines and the re up trendline to keep the idea of the Alt2 wave (4) triangle off the table.

EURUSD 240-minute chart
Look to Join the Bulls

The internals of the suspected wave i aren’t terribly clear, as there is some overlap. Nonetheless, the push above resistance is enough to have us looking for bullish opportunities. A three wave decline that ends near the equality measurement at 1.1054 for wave ii, which would just so happen to retest broken resistance would be a nice spot. We’ll look at the action in RSI and for hourly reversal & follow through bars to initiate bullish swing trades. Stay tuned next week.

GBPUSD

GBPUSD daily chart
Coiled, Above Support & Turning Up

While not really evident on the chart, it was a bullish week for the pound as well. Prices closed above the short term down trendline drawn off the June high, and RSI has turned up above 50 after bottoming above the Sustainable Bearish zone (lower grey). The fact that prices remain above the wave (4) high allows us to look higher while the wave E low holds. A break of that level would suggest something else is underway.

GBPUSD 240-minute chart
The Near Term Trend is Up

Last week’s bullish action is more apparent here where we see a five wave rally up from the wave E & (B) low. Wave (ii) could become more complex, but the clear three wave decline from (i) does mean the larger trend is up, even if a more complex flat pattern develops for (ii). Bottom line is that we’re bullish against the wave E of (B) low, and a push above the wave D high would be potential cause for an acceleration given the sideways, coiled action for the last several months.

AUDUSD

AUDUSD daily chart
Reversal, But No Follow Through…Yet

Wednesday’s stab to a new low followed by a dramatic reversal sets the stage for a larger rally than we’ve seen in over a year. In addition, we saw bullish divergence into the low from above Sustainable Bear territory. That suggests we should not fight higher prices, despite the fact that the wave (v) of C decline doesn’t look like an impulse.

AUDUSD 120-minute chart
Three Waves Into a New Low Leaves Viable Alternate

The 120-minute chart shows our top count. But, since lower time frames suggest that wave (v) counts better as a three than a five, we do need to leave open the possibility that wave (iv) is still ongoing in an expanded flat. A push above the trend channel, and certainly the wave (i) of C low means that prices are headed back towards .8100 at a minimum.

This lack of a clear five for (v) of C brings up an interesting point. While Elliott is by far and away The Wolf’s most important tool, there are others that carry significance too. For instance, I prefer to follow trends rather than fight them, so trendlines and moving averages are important. Structural support and resistance, along with RSI all give clues as to a market’s direction. In a situation like this, where alternates point in opposite directions it also pays to keep risk control tight. It’s a bit like making homemade soup, the weights and measurements might vary slightly from batch to batch, but ultimately we’re getting something that tastes good. Here, we’re giving a large weight to the daily RSI divergence and daily count, as opposed to the 60-minute three wave move we see for (v) of C. That being said, we’re going to keep risk control extremely tight on any AUDUSD trades next week, since we are aware that the count for (v) is less than ideal.

NZDUSD

NZDUSD daily chart
Reversal, No Follow Through

A bullish divergence was present here too into Wednesday’s low, and it also occurred from above Sustainable Bear territory. Prices did push above two down trendlines that have contained wave C, and a retest of the broken level is underway. Of course, we’ve only seen one day of rally, and bear markets often contain such one-day wonders. But, the count is complete, so we shouldn’t fight higher prices, especially on a push above the wave (i) high.

NZDUSD 60-minute chart
Trendline Break & Retest

The action down from the wave (i) high isn’t clearly corrective, which leaves open the possibility of another new low with wave (iv) being an expanded running flat that was complete where we have the wave (i) label. A push above the .6600 area would begin to tip the scales in favor of our top count, allowing the daily bullish divergence to take over. There’s no one who isn’t familiar with the commodity collapse story by now, but that doesn’t mean that we couldn’t see a bounce in the commodity currencies, which aren’t always as highly correlated with commodities as most people think.

USDCAD

USDCAD daily chart
Wave 4 Complete or Ongoing

We’ve adjusted the trend channel in red by connecting the tops of waves 1 and 3. That gives us an idea of where wave 4 could end. Given that we are looking for a sideways 4, it’s possible that it’s already complete, and we’ll see one final push up to complete 5 directly. However, we can’t rule out further sideways action in 4 since wave 3 covered so much ground over the course of the last 5-6 weeks. Also, notice that the wave 3 high saw a Sustainable Bull reading from RSI. That suggests the action down is merely a correction, unlike AUDUSD and NZDUSD .

USDCAD 120-minute chart
Corrective Action Down

Here we can see the overlapped, sloppy action down from the wave 3 top. It’s corrective, we’re just not sure if it’s complete. We can look for support at the base channel and wave iv low should prices decline further, but it seems more likely that prices will test the highs even if 4 is ongoing.

USDJPY

USDJPY daily chart
A Wednesday Reversal

Wednesday’s action was a bearish engulfing pattern at former trendline support, now resistance, and near structural resistance from the June high. There still is plenty of support near 122, the former breakout level, but we favor the red count. That count suggests that prices could return to the 100 area, as hard as that is to imagine. Regardless of how much downside there is, a break below 122 sets the stage for additional downside action, and since the action after the July high is choppy, the least we should expect is a decline towards support at 122.

USDJPY 120-minute chart
Resistance is Too Much to Overcome

Prices are expected to decline to the wave (a) low near 123.00 next week, with further downside potential. While we’re not enamored with the yen, there’s a lot of foreign investors who have been on the long Nikkei, short yen bandwagon, so an unwinding of that “hot money trade” wouldn’t be a surprise. And, given how one sided the bearish opinion on the yen is (with good reason) a sharp downside surprise would reset the market to head towards 150.00 or higher. For now, don’t ignore Wednesday’s signal unless prices can push back above it. Such a move would suggest the black count is still operative.

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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