One of the first things people learn about Elliott Wave analysis is that five-wave impulse patterns point in the direction of the larger trend. The clearer the pattern, the better. But then they get to the chapter about flat corrections, where an impulse is actually the final wave of a correction, right before the preceding trend resumes. This makes it difficult and, to be honest, it never gets easy. You just get used to remembering the always-present flat correction possibility. This is what we recently had to deal with in USDCAD.
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The chart above, included in our EW Pro analysis on May 4th, revealed a very clear five-wave impulse to the downside. We marked it i)-ii)-iii)-iv)-v), where two lower degrees of the trend were visible within wave iii). The simplest conclusion was that more weakness can be expected, but not before a corrective recovery in wave b) was in place. Two weeks later, however, we decided to voluntarily change our mind, before the market forced us to.
USDCAD did, indeed, rise to over 1.3700 as we’d expected, but the structure of that recovery didn’t look corrective. Instead, it was too sharp and fast, increasing the probability that something else was happening. We decided to take a step back and saw that that impulse pattern could also fit in the position of wave c) of an a)-b)-c) running flat retracement. Wave b) being this large was unusual, but it didn’t violate any Elliott Wave rules. So, with USDCAD near 1.3770, this bullish count became our primary one, putting initial targets north of 1.4000 within the bulls’ reach. More than a month later now, the pair is hovering around 1.4200.
Confidence is a virtue in many respects and we’ve plenty of good things to say about sticking to the plan until proven wrong. But there is also nothing wrong with changing your mind if the evidence is piling up against you. Here, proven wrong would’ve meant staying short while USDCAD rises by another 200 pips to as high as 1.3967. Instead, avoiding being too confident in the markets allowed us to see that there was something wrong with that recovery and that maybe it wasn’t corrective at all. As Gary Stevenson put it in his book ‘The Trading Game’: ‘Being wrong is not a sin. Staying wrong is.’
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