January will be a month to forget for U.S. dollar bulls, who saw the greenback falling sharply against most major rivals. USDMXN is no exception as the pair is down by over 4.7% since the beginning of 2018. On December 26th, 2017, the dollar was hovering around 19.90 against the Mexican Peso. A month later, it fell to as low as 18.30. The current weakness, however, follows an even bigger recovery from the July 2017 bottom at 17.45. In order to find out what do these price swings mean for the pair’s future, we need to take a look at its price chart through the prism of the Elliott Wave Principle – a pattern recognition technique, which does not rely on external factors such as news and events.
The 4-hour chart of USDMXN visualizes the pair’s entire development since July 2017. It shows that the rally from 17.45 to 19.91 has the shape of a five-wave impulse pattern, marked as wave (A). The sub-waves of wave 3 of (A) are visible, as well. According to the theory, this means that despite the recent selloff, USDMXN is in an uptrend as long as it trades above the starting point of the impulsive rally at 17.45. In fact, the drop from 19.91 is also quite normal, because the Elliott Wave principle states that every impulse is followed by a three-wave correction in the opposite direction, before the trend resumes.
In USDMXN’s case, that is wave (B). But what is left of it? The chart above shows that the decline to 18.30 is another five-wave impulse, labeled (i)-(ii)-(iii)-(iv)-(v) and marked as wave A. So it follows that a three-wave recovery in wave B could now be expected before wave C down completes the entire wave (B) correction. Once wave (B) is over somewhere near the 18.00 mark, the bulls would be eager to draw another impulsive advance in wave (C) to 20.00 and above.
If this is the correct count, we would see the market’s fractal nature in practice as the pattern formed by waves (A)-(B)-(C) would be the same as the one formed by waves A-B-C of (B), only bigger and in reverse. Interesting.