Ten days ago, on April 4th, USDCAD was hovering around 1.3450. Yesterday, the pair fell to as low as 1.3223, before recovering to 1.3338. As traders, we are interested in the reasons behind that 230+ plunge and how to be prepared for it next time. Should we watch Trump, who just said the dollar was too strong for its own good? Or should we pay more attention to economic reports, political tensions or commodity prices, in order to be able to anticipate the next major move?
Well, in our opinion, even if you take all these factors into consideration, you will still fail to interpret them the same way as the market does. What to do then? Our solution is the Elliott Wave Principle, which we applied to the following chart, sent to clients on April 4th.
There are several patterns in the Wave Principle’s catalogue, but the most common combination is between a five-wave impulse and a three-wave correction. That was exactly what the hourly chart of USDCAD allowed us to recognize ten days ago. An impulsive decline from 1.3534 to 1.3264, followed by a w-x-y double zig-zag correction up to 1.3455. According to the theory, once this 5-3 wave cycle is complete, the trend resumes in the direction of the five-wave sequence. That is why, instead of buying near the upper line of the corrective channel, we thought it will turn out to be a strong resistance and a significant decline should be expected. The next chart shows how things went.
USDCAD reversed to the south almost immediately. The invalidation level for this count at 1.3534 was never threatened. The bottom at 1.3264 was the market natural target. The U.S. dollar breached this mark on April 12th and then fell some more to 1.3223 the next day.
In conclusion, Elliott Wave analysis is useful for:
- anticipating price reversals
- catching large moves
- removing external noise and allowing traders to concentrate on what the market is telling them
So, the next time you rely on the current trend or wait for some news to trigger a move, do not forget to take a look at the situation from an Elliott Wave perspective. It might just make a difference.