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.