The European currency has had a tough time recently, losing ground against major rivals like the U.S. dollar and the Japanese yen. Here we are going to examine the Euro’s drop against the Canadian dollar, which has been in progress since March 20th, when EURCAD climbed to a multi-year high of 1.6153. The last time the pair reached such highs was almost nine years ago, in July 2009.
Given the significance of the recent top it is time to ask what the current decline means. Is it a buy-the dip opportunity or the beginning of an even bigger selloff? If the second is true, should traders short EURCAD right away or wait a while? Let’s apply the Elliott Wave Principle to the 2-hour chart below and see if it can provide the answers.
This graph visualizes EURCAD’s drop from 1.6153 to 1.5317 so far. As visible, its structure can easily be labeled 1-2-3-4-5, which means the pair’s decline is impulsive. Wave 1 is an expanding leading diagonal, followed by a sharp, but smaller rally in wave 2. Wave 3 is extended, allowing us to count its sub-waves two trend degrees down. Wave 4 is a simple a-b-c zigzag, whose ending diagonal wave “c” terminated shortly after touching the 38.2% Fibonacci level. The rest of the plunge is supposed to be the final wave 5.
According to the theory, impulse patterns develop in the direction of the larger trend. This tells us that EURCAD has fallen under bearish jurisdiction and more weakness should follow. Not right away though, because every impulse is followed by a three-wave correction in the other direction. If this count is correct, once wave (v) of 5 completes the entire wave (1/A), a major corrective recovery in wave (2/B) is likely to lift the pair to 1.5700, where the resistance of wave 4 should put pressure on it again. As of this writing, EURCAD is trading in a high-risk reversal area, where it is too late to sell and too early to buy.