This week, let’s get right into the charts for our Elliott wave forex forecasts.
Last week we were looking for a slight dip in EURUSD followed by an upside reversal, and that’s exactly what we got. We were leaning on two facts: 1. Daily RSI hadn’t fallen into Sustainable Bear territory (lower grey zone), and 2. The action down from the wave (W) high is not impulsive. Now, we need to see a push above the red down trendline, which would go a long way in improving the odds of our top count. Do notice that daily RSI bottomed on Monday from above the grey zone, if only by a slim margin. That keeps the top count on track for now. We’ve made a minor change to the alternate count that was looking at wave ((B)) as a triangle, because of the dip below the May low. Now, if lower prices are to be had, it would either be that wave ((C)) was still ongoing with a triangle as wave (4), or an ending diagonal to complete (5). One of these alternates would be the favorite on a drop below Tuesday’s low.
The action up from the suspected wave B low isn’t a textbook impulse, but it can be counted that way, since there’s no overlap. Also, the drop from Thursday’s high looks to be a three wave move, which means we should get a push back above there at a minimum. Prices really need to gain traction above 1.1200 to put the bulls in a comfortable position to challenge the range highs once again.
Unlike EURUSD, the pound was unable to show an upside reversal. That’s fitting with our top count, which suggests wave (B) is unfolding as a triangle. That will remain the top count as long as prices remain above the wave C of (B) low. Ideally, though, they also remain above the red up trendline as well. We do like the fact that the pound has been able to tread water since the big gap down in December. And, notice that the last Sustainable Bear reading was back in March. A push back above the 50 level in RSI would turn many “indicator watchers” bullish, and 1.6500 isn’t out of the question, which is near the September high.
From an Elliott perspective, there’s no way to count the action down from the wave B or wave D highs as impulsive. That means the one larger degree count is to the upside. Now, that doesn’t mean prices can’t breakdown, it just implies that we should be anticipating higher prices, contrary to the many people focused on the “dollar rally” and “policy divergence.” We stand by the idea that the Fed will be reluctant to hike rates into a deteriorating economic picture globally (see Taylor Rule chart below), especially when you look at how some of the EM currencies have performed lately. Does Yellen really want to cause a repeat of the ’97 Asian contagion, with Brazil, Turkey or Chile being this cycle’s trigger point?
We’ve been bearish AUDUSD for some time now, as the top count continues to describe the action perfectly. There’s now no reason for prices to be back above the down trendline, let alone the horizontal red resistance line. A push above there would suggest an important low is in place. The weakness in Aussie, is concurrent with the commodity weakness, and how long will it be until the leverage within the Australian economy blows up? Remember that commodities have a tendency to spike at extremes, and that may be how we see the AUDUSD bottom – not with a whimper, but a bang. Notice that the Sustainable Bear reading likely means any bounce will be corrective, a wave (iv) to our eyes.
The lower bound of the channel seems a ways off, but we’d be quick to exit shorts if it’s touched. Now that the trend has become clear to everyone, that’s the point where we can expect some upside volatility. Notice that wave (ii) was flat, so wave (iv) should be a sharp zigzag, which will likely take many traders off guard. Also, notice the lack of Sustainable Bull readings since early May, which was a tip-off that lower prices were in store.
As suggested last week, “Watch for Corrective Bounce From Channel” forecast the action correctly. In addition, the channel acted as resistance on Thursday when Kiwi broke down again. There was a slight bullish divergence present into the low, which does speak to the fact that the decline has become mature. However, it also suggests a new low is coming, and that continues to be our call. How important the next low will be will depend on the action, but we think it’ll be significant. Will the Fed push off a rate hike past its September meeting in the next couple of weeks?
The wave (ii) decline had an extended wave in it. Whether the extended wave wave v as we have it, or wave iii really doesn’t matter. What does matter is that the action up from (iii) is not an impulse, which means another new low is in the cards. Watch the trendline that connects the September and February lows, which is where prices bounced from this past week (Actually, they bounce at the convergence of the channel and that line). That action suggests that the market thinks that line is important, and sine, like AUDUSD, the decline is mature, we’ll now begin to trust reversal action that we see once a new low is struck.
While we can debate the count, here’s what’s clear:
- The action down from the June high was in three waves.
- The action up from the July low is impulsive.
Is there anything more we need to analyze? Prices are back above the down trendline and the up trendline which only showed a two day “false breakdown at the July low. There’s a number of ways to count the intraday action (see below), but we should keep in mind these big picture items. One count that’s not shown is the idea that we have an ending diagonal for wave (5) up from the January low. That allows for one more marginal new high before a dramatic reversal (and that’s what some equity markets suggest too).
Perhaps we’ll get a retest of the up trendline, or another false break, prior to seeing more upside next week. We’re certainly not going to stand in the way of higher prices though, and think a bullish nimble strategy should work here over the coming week or two. If indeed this and our GBPUSD counts are correct, then an opportunity should exist in GBPJPY.
Here too the top count is on track. The Sustainable Bull readings mean that any pullback will likely be a correction, in this case wave 4. It should be a sideways correction, ideally a nice triangle to give us some trade-able waves. The action of retesting the breakout is a common technical occurrence which would fit with our count. We can’t say for sure that the wave 3 top is in place as all of the subdivisions of wave (v) aren’t clear, yet.
We can see that wave (v) isn’t clearly a five wave move yet, but it’s close. In addition, we have some bearish divergence into the highs, and the 240-minute RSI wasn’t into Sustainable Bull on Friday. We will now be looking for a correction to develop, but we won’t be too aggressive here.
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.