The market’s failure yesterday afternoon below last Fri’s 1.2652 corrective low discussed in Tue’s Technical Blog as a tight but important short-term risk parameter defines Tue’s 1.2779 high as the END of a textbook 5-wave rally from 26-Jul’s 1.2414 low labeled in the 240-min chart below. Per such we are considering 1.2780 as not only a new short-term risk parameter from which non-bullish decisions like long-covers and cautious bearish punts can now be objectively based and managed, but also our new LONG-TERM risk parameter around which longer-term directional biases and exposure can be objectively toggled. In the meantime and as we’ll discuss below, traders are advised to approach this current relapse as either the resumption of the broader downtrend from May’s 1.3794 high OR a mere correction of early-Aug’s pop that could provide an outstanding risk/reward buying opportunity following a countering bullish divergence in mo from the 1.2595-to-1.2550-range.
Given the extent of May-Jul’s collapse, this month’s rebound falls well within the bounds of a mere (4th-Wave) correction. Yesterday’s bearish divergence in momentum breaks this recovery and identifies Tue’s 1.2779 high as THE high the market now needs to break to not only reinstate the uptrend, but confirm a larger-degree correction or major reversal of May-Jul’s collapse. And while traders are advised to keep their longer-term directional biases open, there are, without question, technical factors in place that warn of a developing BASE/reversal-threat environment. These factors include:
- the market’s rejection of May’16’s 1.2460-area low/support
- the Fibonacci fact that the decline from 05-May’s 1.3794 high is exactly 61.8% of the length (i.e. 0.618 prog) of Jan’May’16’s preceding 1.4691 – 1.2460 meltdown and, most importantly,
- the return to a frothy 71% reading in our RJO Bullish Sentiment Index shown in the weekly chart below.
Indeed, only a glance at the weekly chart below and monthly chart further below is needed to see that such currently frothy bullish sentiment accorded the CAD futures contract has warned of and accompanied pretty much every key USDCAD correction or reversal higher.
An additional factor contributing to a base/reversal threat is that the INITIAL 5-wave structure to this month’s rebound is a basic Elliott Wave tenet that corrections are not 5-wave patterns; they are comprised of only 3-waves. And while we’ve learned not to be held hostage by Elliott “theory”, what this infers is that either the past three weeks’ recovery is either only the (A-Wave) START of a much more extensive correction higher OR the initial 1st-Wave of an even more protracted reversal higher.
If this weren’t enough, the monthly log chart below shows the past year-and-a-half’s correction thus far stalling around the exact (1.2390) 38.2% retrace of the entire 4-1/2-YEAR rally from Jul’11’s 0.9405 low to Jan’16’s 1.4691 high.
Circling around then to the 240-min chart below, IF the early-Aug rebound was just a correction and May-Jul’s downtrend is resuming, then we’d expect sustained, trendy, impulsive behavior down to eventual new lows below 1.2414. IF, alternatively, the Aug pop is just the initial rally of a major correction or reversal higher, then we would expect the market to stem the current relapse with a bullish divergence in shorter-term momentum from levels between the (1.2596) 50% retrace of the recent 1.2414 – 1.2779 pop and 26-Jul’s 1.2414 low. If/when such a more market-defined low, support and risk parameter can be identified, the risk/reward merits of a punt from the buy side could be extraordinary ahead of a rally that could produce extensive gains above this week’s 1.2780 high. For the time being keeping one’s powder dry in a neutral/sideline policy is advised.