GBPUSD bulls managed to take a breath after the pair recovered from as low as 1.2774 to almost 1.3000. Unfortunately, there is no way to know what this means without taking a look at the big picture and see where does this recovery fit into it. Should we join the bulls or get ready for the bears’ fierce revenge? Let’s apply the Elliott Wave Principle to the hourly price chart of GBPUSD and see what happens.
According to the theory, trends move in repetitive patterns. A five-wave pattern, called an impulse indicates the direction of the larger trend. On the other hand, before the trend could resume, a three-wave correction in the opposite direction should follow. As the chart above shows, the pounds decline between 1.3267 takes the shape of a perfect impulse, whose first wave is extended, but whose fifth wave is not longer than the third. It is also interesting to notice that wave 2 is an expanding flat correction, while wave 4 is an expanding triangle. This leads us to wave 5, which terminated at 1.2774 and gave the start of the second part of the 5-3 wave cycle – wave (2/B) – which appears to be an A-B-C zig-zag retracement.
If this count is correct, we should get ready for more weakness in GBPUSD from now on, because wave (3/C) to the south should follow. The relative strength index further supports the bearish thesis by showing a divergence between waves C and A of (2/B).
In conclusion, the Wave Principle suggests it is not a good idea to start buying GBPUSD right now. It might have been a good week, but the next one could differ significantly, especially since wave (3/C)’s first targets lie below the bottom of wave (1/A). 1.2700 might be closer than it seems now.