After slightly exceeding 1.3000 on October 8th, USDCAD retreated to 1.2926 two days later. Given that the pair has been declining since the 1.3386 top registered in late-June, assuming the bears are returning was quite justified. In addition, there was a declining trend line, which had previously led to significant selloffs on two separate occasions.
According to conventional technical analysis, it made sense to expect more weakness after USDCAD bulls were initially rejected for the third time. Elliott Wave analysis, on the other hand, relies on a lot more than a simple trend line. It is a pattern recognition technique, which can help traders identify unreliable support and resistance levels in advance.
So instead of joining the bears between 1.3000 and 1.2900 last week, we decided to take a closer look at the structure on the rally from 1.2783 to 1.3010. The following 30-minute price chart of USDCAD was sent to subscribers as a short-term update on Wednesday morning, while the pair was still hovering around 1.2960.(some marks have been removed for this article)
It turned out the structure of the recovery from 1.2783 was impulse. This means it consisted of five waves, labeled i-ii-iii-iv-v. Impulses indicate the direction in which the larger sequence is developing. On the other hand, every impulse is followed by a correction of three waves in the opposite direction, before the larger trend can resume.
USDCAD Elliott Wave cycle
Taken together, the five-wave rally to 1.3010 and the three-wave a-b-c decline to 1.2926 formed a textbook 5-3 wave cycle. To Elliott Wave analysts this pattern meant only one thing – USDCAD was going up.
In other words, the resistance line conventional technicians have been relying on was unlikely to hold. And it didn’t. Later the same day, USDCAD jumped over the fence and climbed to 1.3070 for a quick 110-pip gain.
It now faces another obstacle in the face of the resistance area near 1.3070 – 1.3080. Can the bears rely on it this time?
What will USDCAD bring next week? That is the subject of discussion in our next premium analysis due out later TODAY!