Regardless of what we think about the Fed’s inability to raise rates, the dollar seems to be powering higher versus the euro. Last week’s trendline break completed a five wave decline, and it also pushed RSI into Sustainable Bear territory (lower grey zone). As such, a corrective bounce will re-leave the selling pressure, likely a wave (ii) bounce. We see a three wave rally complete, and although it’s small, we’re not interested in fighting lower prices. Use any bounce as a reason to turn bearish, and it would take a bonce back above the broken up trendline to suggest a deeper bounce is taking place.
Unlike EURUSD, the pound/dollar didn’t decline in a clear five wave manner last week. And, the bounce is awfully sharp. The top count is still best, although we’re not interested in fighting higher prices above Friday’s high, and especially the suspected wave ii top. RSI has pushed back above the 50 level, and since it’s trending higher, one could make the bullish case per the alternate count.A break of Friday’s low would likely be the start of something significant to the downside.
If prices are headed higher, they should spend almost no time waiting around. RSI can barely withstand any further downside, and since we do have nearly two equal waves up from the low (and prices remain beneath the down trendline), we don’t want to assume the downtrend is over until prices prove it. A push above the .7200 area will leave a three wave decline on the chart and challenge the bears. We like the idea of a bullish development above there, against Friday’s low.
Here’s one thing to keep in mind: We think wave I is complete, but it might not be. Since the larger trend for the yen is towards worthlessness, we need to be a little careful in trading counter the uptrend versus the dollar. For all of the problems that exist in the US, with the Fed, unsustainable debt levels and needed reforms, the problems here are dwarfed by those in Japan. The BOJ basically is monetizing all deficits, owns almost all of the JGB market liquidity, and it isn’t afraid to have government entities actually own the factors of production (outright stock ownership).
So, we should be using any declines to get bullish. And, you could even make the case that the wave II, or other correction, is complete at the 116.15 low. As such, we are currently bullish, and it’s possible that rather than trading out of this position near a wave (B) top, we should just trail a stop in case the larger trend has turned up and prices are headed to 140.00 directly.
We like the idea that prices traced out a five wave rally from the wave 1 or 4 low. As such, regardless of the larger trend, we should see a corrective decline for (ii) or (b) followed by another five wave rally. The loonie seems to be tracing out its own wave pattern, which is weaker than some of the other commodity currencies. Similar to USDJPY, we may need to allow prices to trade higher here too without attempting to call the top.
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.