A month ago we shared our view that despite being long-term bearish on GBPNZD, we thought it was time for a notable recovery. While the pair was hovering around 1.8400, the market was sending a message that a recovery to roughly 1.9000 was around the corner.
As always, this message had nothing to do with external factors such as news or events. Instead, it had everything to do with market psychology and the Elliott Wave Principle. Take a look at the chart below, published on December 3rd, 2018, to refresh your memory.
The Wave theory states that a three-wave correction in the opposite direction follows every impulse. As visible, GBPNZD’s decline from 2.0470 had taken the shape of a five-wave impulse pattern. This meant that the bulls can be expected to return sooner rather than later. The MACD indicator gave us another reason for optimism by showing a bullish divergence between waves 3 and 5 of (1). The stage was set for a rally in wave (2). The updated chart below reveals what happened next.
Wave 5 developed as an ending diagonal as the bears managed to drag GBPNZD to 1.8127 by December 11th. Then, a 993-pip rally to 1.9120 followed. Leaving the bear camp a little prematurely near 1.8400 turned out to be the right decision. Now, with GBPNZD already above the 1.9000 target, is it time to join the bears again?
Most likely not. The recovery to 1.9120 looks like a five-wave impulse, as well. This tells us that even though a three-wave drop in wave “b” can now be expected, wave (2) is not over yet and the bulls are still in charge.
Once wave “b” drags GBPNZD to the support near 1.8400, the bulls would be eager to return. Wave “c” has the potential to lift the pair to the resistance area between the 50% and 61.8% Fibonacci level. In terms of price, this translates into a rally towards 1.9250 – 1.9630 before the downtrend finally resumes in wave (3).
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