The U.S. dollar has been in a strong uptrend against the Chinese Yuan since mid-January, 2014. In less than three years, USDCNH climbed from 6.0150 all the way up to 6.8494 so far. After such a massive gain investors might start to think it is a good time to join the bulls. Unfortunately, no trend lasts forever and we see one big problem with USDCNH’s uptrend – its chart.
The weekly chart of USDCNH shows that the entire advance we have been witnessing during the last three years could be seen as a five-wave impulse, which means the trend is up. However, according to the Elliott Wave Principle, every impulse is followed by a same degree three-wave correction in the opposite direction, before the trend resumes. This means that instead of falling in love with USDCNH’s stellar performance, we should prepare for a major pullback with the potential to erase all of last year’s gains. Additionally, both the MACD and RSI indicators are showing a strong bearish divergence between waves (3) and (5), thus supporting the negative outlook. If this is the correct count, chances are a selloff to the area between 6.5000 and 6.4000 would begin soon. The bulls need to recognize the danger as soon as possible.
