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Elliott Wave Months Ahead of USDCNH’s Selloff

It has been a rough 2017 for USDCNH bulls so far. The pair has been in an uptrend since January, 2014, but it feels as if it was simply waiting for the calendar to change. The dollar climbed to as high as 6.9872 in late-December, 2016. Nine months later, it is down by 6.6% to 6.5251 as of yesterday.

Fortunately, USDCNH’s selloff did not come out of the blue, at least to Elliott Wave analysts. Back on November 11th, 2016, we thought there was “One Big Problem” with the pair’s uptrend. That problem was a five-wave impulse pattern approaching its end on the weekly chart of USDCNH. Take a look at it to refresh your memory.

usdcnh elliott wave analysis

According to the Elliott Wave Principle, every impulse is followed by a three-wave correction in the opposite direction. As visible, the dollar’s advance against the Chinese yuan was a textbook five-wave pattern. As if that was not enough, both the relative strength index and the MACD indicators were showing a strong bearish divergence between the waves (5) and (3). So instead of buying near 6.8200, we thought “the bulls need to recognize the danger as soon as possible.” The updated chart below shows USDCNH’s progress, or should we say regress, in 2017.

usdcnh elliott wave analysis update

We have always said that picking tops or bottom is extremely risky and should be avoided. USDCNH is a good example of this fact. Even though the pair was, indeed, approaching the end of its rally in wave (5), it still managed to add another 0.1678 before eventually giving up.

Now what? Well, if we assume wave II/B is developing as a simple (a)-(b)-(c) zig-zag correction, we see that wave (c) is not over yet. This means the bears still have all chances of dragging the rate down to the support area of wave (4) near 6.4500 – 6.4000. Then the 5-3 wave cycle would be completed and the trend would be ready to resume in the direction of the impulsive sequence.

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