As discussed earlier, we will never know in advance when and where an extension will finish. We can only guess! Yesterday we got the first recovery to 1.5015 area without a problem (that was shown as point “A” in the chart of yesterday). However, the picture changed later on, and we have to relabel the counts. I could still be wrong, but this is essentially how one uses Elliott Wave in practice. Take a look at these charts. I am still counting the 3rd wave as having finished at the original position. This could itself be wrong, and we could have seen an extended third wave instead of an extended 5th. Irrsepective of which is the correct count, one thing is certain. Once a 5 wave movement is completed, we need to see a correction of the whole set of 5 waves, and even a 50% recovery will take us to around 1.5030, not too far off from the 1.5065 level we have been looking for. Enjoy.
Early this morning I suggested that the 5th wave will extend. Why? Typically, at least one impulse wave in a five-wave sequence will experience an extension. As the first and third waves were of normal proportions, we were on the lookout for the 5th wave to extend. However, what we were unsure about was how deep that extension could take us. We were however optimistic about a nice recovery back to 1.5060/70 area once the extension is finished. So far the GBP/USD has declined to 1.4935, and everything points towards further losses. Yet, I would like to warn you not to get carried away with an extreme bearish view at this stage of the progression. When a fifth wave extends, we should be ready for a swift recovery back to the 2nd wave of the fifth. That recovery may involve a double retracement, ie we could get an initial rally, then a retest of the low, and then another stronger rally. But be prepared for some interesting moves ahead that is going to crush a lot of traders who are not alert to this phenomenon. We will take a look again tomorrow. Ramki
Quite frequently we come to the office in the morning and see that a big move has happened overnight. Our first instinct is to join the move on any pull back. However, it pays to visit the short term charts before jumping in. Look for a five wave pattern, and figure out WHERE we are in that sequence. Today’s chart of GBP/USD shows a neat little Elliott Wave pattern that a short term trader can put to use. The 2nd wave was a simple zig-zag and finished just above the 61.8% retracement level. The 3rd wave was SHARP, which is in keeping with that wave’s personality. The 4th wave covered 38.2% of the 3rd wave, and we are in an extending 5th. The internal waves of this tiny 5th shows that its own mini 3rd wave has extended! So we are probably not too far away from an intra-day low. Of course, no one can say where an extension will finish. It can just keep going lower. However, once the extension is finished, look out for a sharp recovery that will take you back to the 1.5075 levels. Good luck.
In this update, I am going to look at the medium term outlook for Sterling Pound, or GBP/USD. Those who have subscribed to this blog would have seen the last medium term update on cable, (another name for GBP/USD) posted here on 4th August 2009. (here is the link to that post). But the more important medium term update for Sterling Pound was written on 27 May 2009, and I urge you to read that post again. There two updates are pretty good examples of how one could use Elliott Wave analysis to navigate the market. They serve to highlight the fact that we first come up with the direction of the medium term move, and also a ball-park target. As the market unfolds in the anticipated direction, and approaches the said target, we look at fresh clues and adjust the original target to take account of any new information. These tweaks took place over several shorter-term updates which are also documented in this blog. All you have to do is to search under Forex and look for GBP. Over a period of time, we have gone from a monthly chart all the way down to a 10-minute chart! Elliott Wave Principle works in all time frames.
The recent insistance by Mr Mervyn King that the Bank of England cannot rule out fresh quantitative easing only confirms that there are a lot of downside risks for the UK. Clearly this is not supportive for the Sterling Pound. But let us go back to the GBP/USD charts. As you can see here, a key support has broken decisively and we are headed towards 1.4700 as a first step. Allow for a few sessions of back-and-forth moves (part of a mini 4th wave pattern) and then fresh selling to come forth again. While we stay below 1.5250 now the Sterling Pound will remain under considerable pressure and gradually ease down to 1.4150 initially, and should the going get tougher (perhaps with a hung parliament), we can even say the original target of 1.3300 area is within reach in the coming months.
I am going to be away for a month on holidays. So will catch up with you when I return. In the meantime, here are two quick updates that you might find interesting. One is on GBP/USD and the other on AUD/USD.
As for India’s Sensex, I think we have seen a near term top. Use recoveries to 16,600 plus levels to get out of any stale longs that you still have, as we will likely decline to under 15,000 in the coming days. Early support lies at 15760 area.
On 5th October 2009, I posted an early warning to traders of Sterling Pound (GBP/USD)that there is something fishy about the decline from 1.6742, and we are likely to see another rally in the Pound. Trouble is, it is so damn hard to believe such calls, and when the rally eventually shows up, many of us just freeze. Some traders would have continued to pick tops, and lost lots of money. One mistake that many interbank traders continue to make, (and I am no exception to this folly !) is they fail to switch their minds from intra-day charts to daily charts when something unusual happens. My post of 5th October was a bigger-picture call and was based on the daily chart. The moves we have seen in the last two trading days fits in to such a time frame. The update of 12th October (which I called a real-time update on sterling) showed a one-minute chart and also a TIC chart. This latter post was for intraday trades, and it called for a decline in GBP to 1.5685. The actual low was 1.5705. If a trader sold at the first resistance when the Pound jumped from 1.5705, he can be excused, because one can never be sure whether the bounce was corrective or not. He/she would have been quickly stopped, as I too was! But when the move continued higher, an alert trader would have considered if the big picture was changing too. If you have been a careful reader of the GBP/USD updates posted here over the last few months, then this lesson is very valuable indeed.
The next question is how high can the bounce go? There is one ‘secret’ that many practising wave analysts tend to forget. Elliott reckoned that a correction will have two dimensions: time and space. A typical move tends to follow the fibonacci summation series. If a rally has moved up 3 days and remains bid, you can continue to look for it to last 5 days. Beyond 5 days it should last for 8 days. If you look at the daily chart, you will see that we have had FOUR “up” days. So one more day of rallying is very likely. I offer 1.6467 as a first target, and beyond that we could well see 1.6545.
One can make lots of money in these markets provided one has the appetite for risk, and one is willing to follow the rules of the game. A key rule concerns money management. It is OK to lose on a trade, but be sure that you don’t lose so much money on any one trade that you are unable to come to the table again. Good luck and bifn. Ramki
This is going to be a quick update. The chart explains it all. If we come below 1.5775, we shoudl come off to 1.5685 initially and perhaps a lot lower.
The intra day charts looks like we could be staging a rally later today, especially if we dip towards 1.5860 a second time. The formation is clearly looking like an expanding ending diagional triangle, usually a pretty powerful indicator of a imminent reversal. So there is a low risk opportunity looming ahead. Good luck. Ramki
Fans of Eliott Wave analysis know that a trader has to be alert to correctly interpret new signals as they emerge. This is the ONLY way one has a chance to make money in any market, particularly in the forex market. The latest puzzle that faces us is actually in the big picture. The decline from 1.6742 does not have the personality of a third wave. Sure, we made lots of money trading both sides of the market. We accurately predicted the decline to 1.5800 area twice, as well as the recovery to 1.6125. But in the big picture, there is something wrong. When I get this feeling, I tell my friends in the forex market to take a break. Yes, we could still see some moderate weakness. But the end point of that weakness is less clear. More importantly, when we get a bounce, it could be sharp. On balance, it is time to step back and wait for more clues. Maybe we should turn our attention to the EUR/YEN and USD/YEN now!