Last week we were looking for a continuation of the rally in the euro, which failed to materialize this week. As I write, it seems the Eurogroup is closer to allowing a Greek disorderly default. And, while that’s a possibility, that’s not what we are focusing on. Instead of focusing on fundamental developments, or only on Elliott waves, we’ll continue to use our Context, Momentum and Signal process.
Both our Context and Momentum studies suggest further upside for EURUSD (see below). This simply means that the odds suggest a bullish continuation (perhaps 80% likely), it doesn’t mean that a bullish outcome is guaranteed. However, our Signal part of the process gave a bearish daily signal on Tuesday, as prices fell hard and back below the broken up trendline, which means that on a daily basis, we need to wait for the confirmation of a turn back up. We often mention, in this weekly Elliott wave currency forecast, about waiting for a “turn and follow through.” Allow me to clarify what we mean by this, as it’s quite simple, and it can help keep you out of trouble.
The “turn and follow through” concept is simply a two bar pattern – a signal bar and a confirmation bar. The first bar will be a typical candle reversal bar (bull/bear engulfing, piercing line or hammer/shooting star are most common) followed by a second bar that closes above the high of that reversal bar. After that two bar pattern, one can enter a trade with a stop below (or above if a bearish reversal) the signal bar (A great example can be seen in last week’s daily USDCAD chart). These can be used in any timeframe, but work especially well when the one larger degree pattern agrees with the signal’s timeframe (i.e. 240-minute bullish reversal when the daily timeframe Context & Momentum is bullish).
Now, let’s get into the Elliott wave forex charts for the specifics.
So, here we see the decline back into the channel along with Tuesday’s big bear bar, which are bearish developments. Notice though, that RSI has remained near the 50 area, certainly not indicating bearish tidings near term. We’ve identified the red up trendline as key support since it sits near the 61.8% retracement of the wave 1 advance, along with former support and resistance (wave 2 low and wave A of (A) high). In addition, we’re showing two alternate interpretations. One suggests wave 2 is about to bottom in an expanded flat, and the other suggests something more immediately bearish with the Alt 2 count.That will become the favored view should prices fall back below the red up trendline, possibly on a disorderly default in Greece.
Here we see a possible five wave decline that is complete for wave c of (ii). There was a slight bullish divergence into Friday’s low, although we’d feel more comfortable with this view after a push above the down trendline in an impulsive manner and a corrective set back. It’s after that corrective set back, that we would look for a “turn and follow through bar” on an hourly basis.
We saw a similar breakdown in GBPUSD this week, although it’s possible that this pair has already turned higher, as there was a bullish divergence with EURUSD on Friday, since the euro broke to a new low, but the pound didn’t. The Momentum profile on a daily basis is still bullish as is the Context. We did see a weakish turn higher after the low on Wednesday, and unless prices break the up trendline, we’re sticking with the bullish view here. That’s not a license to fight weakness, it’s simply the idea that we should favor bullish action once the market shows us it wants to head higher.
In the shorter term view we can see support offered by the up trendline and the wave (i) high. A push above Thursday’s high will likely turn the tide in favor of the bulls. Until then, we can’t rule out one more small stab lower to complete (iv), since there’s only three waves up from the wave (iv) label right now.
Friday’s breakdown may signal the resumption of more sustained selling pressure. We can lower critical resistance to the wave (iv) high, although it seems unlikely that prices will exceed .7772 if the top count is correct. We’ve been thinking that one more new low will complete a significant Elliott wave, although there’s little reason to fight additional weakness. We’ll want to see a weekly bullish reversal candle prior to wanting to pick a bottom here considering the potential issues in China (Australia’s largest customer).
Notice the 120-minute breakdown on RSI into Sustainable Bear territory. Targets to the downside include a 100% range expansion of the wave (iv) rally which targets .7347. We could use Friday’s high as an aggressive risk control point, and unless something less bearish is underway, prices won’t be back above there, and certainly not .7772.
There’s little reason to be bullish on the Kiwi, even if prices are approaching a target. The Sustainable Bear readings on daily RSI continue to put odds in favor of continued weakness. Our opinion is that .6600 will provide support that sees a very significant rally develop, but, as with Aussie, we’re going to want to see actual evidence of that fact before we decide to put capital behind that opinion.
The caption of the daily chart says about all we need to say – the evidence remains in favor of the top count. Until the longer term up trendline or the 61.8% retracement level of wave 3 is broken, we’ll continue to favor the upside given the Sustainable Bull reading into the high on RSI, and the bullish behavior of RSI into the wave 4 low.
The closer look shows not only the support from the 50% retracement of the wave 3 rally, but also the broken trendline off the high. The decline from the wave 3 top is corrective looking, and the action up from the wave 4 low looks impulsive. A push above the wave (i) high will likely make calls for 130.00 come out of the woodwork. Of course, once a new high is seen, we’ll be looking for a much bigger top and turn back down.
Unfortunately, the rally up from the suspected wave 2 low isn’t clearly impulsive. In fact, it appears to be more of a correction, which suggests a more complex wave 2 may be underway. So, perhaps prices will fall back towards the wave 2 low prior to a more sustained advance. A push above the down trendline would likely mean that our top count was correct, and that either a leading diagonal has kicked of wave 3, or a series of ones and twos. Clearer counts present themselves elsewhere for now.
USDCHF is in a similar position to USDCAD. The action up from the wave (ii) low isn’t a full impulse yet, although it does look like there’s a clear third wave impulse internally to the rally. So, we await clarification here, although we still can’t rule out a deeper wave C. If indeed we see a minor crisis develop as a result of Greece on Monday, it seems like the franc is set to suffer some c consequences rather than get a “flight to quality” bid. That would certainly be a change from the past, and potentially speaks to the absurdity of having the Swiss national bank, or any central bank own stocks.
It does seem that the world’s monetary authorities have taken currency weakness to its logical extreme – buy anything with currency conjured out of thin air. However, if the intent is to grow an economy, you’d think that the geniuses running central banks would understand that buying a stock in the secondary market has NO impact on the company or economy. It simply exaggerates an existing trend. This is the reason that central banks and governments should allow private currencies; they should not be in the business of demanding by fiat that its citizens use one particular currency over any other.
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.