It has been over two and a half months since our last post about GBPCAD, called “Not the Time to Join the Bears in GBPCAD”. The title speaks for itself – while the pair was trading near 1.6290 on October 31st, 2016, we thought a significant recovery should be expected, before the downtrend resumes. But neither Brexit, nor Canada’s economic outlook had anything to do with our opinion, because it was based solely on the Elliott Wave analysis shown below.
As visible, there were two of reasons to expect a recovery. First, GBPCAD’s long-term downtrend was supposed to form the so-called impulse. Impulses consist of five waves, but in this case, waves IV and V were still missing. Since the wave structure of wave III suggested it was over at 1.5759, the bears were likely to take a rest and allow the bulls to lift the pair to the resistance of the upper line of the trend channel.
And second, the MACD indicator was showing a strong bullish divergence between waves (5) and (3) of III, adding more confidence to the short-term positive outlook. However, the bottom of wave III was not going to stay safe forever, because once wave IV was over, the bears were anticipated to return and drag the pair even lower. The updated chart below shows how the situation developed.
On November 11th, GBPCAD climbed to 1.7117 in wave IV, only to keep falling for the next two months in wave V and reach 1.5736 as of today. So far so good, but what should we expect from now on. Well, every impulse is followed by a three-wave correction in the other direction. This means that once again, now is not the time to join the bears, because a major recovery might be just around the corner. Furthermore, if we take another look at the MACD, we will see that it is now flashing a double bullish divergence between waves III and V. We certainly do not say that traders should buy the pair right away, because picking bottoms is never a good idea. However, selling GBPCAD is also very risky, since there is not much power left in the bears’ paws. According to the Wave Principle, this is one of those moments, when simply staying aside is the best strategy.