Pure Guesswork

Last night we broke through a key Fibonacci support level around 1.3730. The break has not been that drastic (so far) and if we manage to close the week out above it, we could see this level come into play as genuine support. This happened in late December when the EURUSD broke below a support level around 1.4260 but then recovered and held that level for about 3 weeks.

These Fibonacci levels derive from the internals of what was a long term impulsive move from late March of 2009 to the highs in late November of that year. This enitre move can be seen as the third wave of a classic 3 wave correction of the fall in the EURUSD in the 2nd half of 2008.

Concentrating on the last or "C" wave, we see an initial base built, with a high at 1.3737 in March of last year and a subsequent pullback to 1.2884 in late April. Using that base as a measure we could project an impulsive move which would equal 2.618 times the length of the pullback from 1.3737 to 1.2884. That target was 1.5117.

We surpassed that level by a few pips (approximately 30) in intraday trading, but we never had a weekly close above it (in fact, we never managed to have a weekly close above 1.50).

Looking at that last impulsive pattern (rather than the entire move from October 2008 low to November 2009 hight), we find on a daily chart that support in this current downturn has come at internal Fibonacci levels of that impulsive pattern.

Seen in greater detail on an 8 hour chart:

And on a 4 hour chart:

I believe that if today's adventures lead to a recovery above that area around 1.3730 we could see that level come into play as (at least temporary) support, much as happend at the 1.4260 level back in late December of 2009. We tried about an hour ago and failed. Very likely the market will try again.

A further update on a pattern noted last Wednesday, January 6, and yesterday.

Once again the AUDUSD has bumped up against resistance around the 0.9326 level, the high which was made in late October.

This is the second time this week that an attempt to break this level has found sellers. This can be seen in greater detail on an hourly chart:

I would suggest that this level around 0.9320 -- 0.9330 is a more important resistance level than the higher high which was made in mid-November around 0.9400. The November high, though higher by 70 pips or so than the October high, was part of an irregular correction. The October high was the culmination of an impulsive move which I believe leaves a deeper psychological imprint on the market. If today or tomorrow the AUDUSD succeeds in breaking through that 0.9326 level in a convincing way, I do not believe the 0.9400 level will provide serious resistance. If, however, we see more downside action today, the notion that we are forming a significiant head and shoulders pattern in the AUDUSD should be taken more seriously.

Going back to a post from a week ago, there were these chart showing an impulsive move up and a 3 wave correction to this move.

And:
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Since that time the rally from the end of the 3 wave correction carried on rather convincingly until it got to the level of the initial impulsive top (from late October of last year). It found convincing resistance there.

We find a 3 wave corrective pattern beginning at the low on November 26th of last year and ending with the top made on the first trading day of 2010. The third wave, labeled as Z on the chart below, took almost 3 times as long to unfold as the initial X wave up--yet they are equal in length.

An 8 hour chart:

While there has been a higher high since that 93.20 high on January 4th, it can be seen as the 2nd wave in an irregular corrective move to the downside.

On the following 2 hour chart one can see how the 3rd wave of this minor correction (to the the larger corrective move) ends at a level exactly 1.272 times the distance of the initial wave.

There is an additional interesting symmetry in the irregular (y) wave. It also involves the minor Fibonacci ratio of 1.272, ending 1.272 times the length of the (x) wave (as figured from its beginning).

Thus we have an initial corrective move down, and then a widening corrective move in 2 larger waves, each of which has a 1.272 relationship with the original (x) wave.

Eurusd rally faded at the 1.272 level (that is, 1.272 times the distance from the previous high on 1/5 to the low on Friday).

Almost certainly this is a temporary set back for a move to at least 1.46.

The risk trade or carry trade or whatever other appelation you want to put on this mindset is back on. The spectre of early CB tightening has receded with Friday's bad job number. Yet there seems something unconvincing about this return to risk. Like someone who has begun to sober up but then changed his mind and started drinking again. Unfortunately what usually follows is not a return to euphoria but a rather bad headache.

The Fibonacci pattern most recently noted in Monday's post, proved operative again this morning as EURUSD bounced at the 1.4260 level right as the employment numbers were released.

This level was the 1.618 Fibonacci target on the way up from April through November. Once the rally ran out of energy in November around the 2.618 extension, this lower target level became an area of support.

Shown on a weekly chart:

On a 4 hour chart one can see how the bounce this morning came right on the 1.4260 level:

What is significant is not that the EURUSD rallied on the bad employment number, but rather that before the number came out, the market was unable to break through that 1.4260 barrier. Despite all the bullish talk in the market before this number came out--all the talk of early Fed moves, of wildly positive employment numbers, etc.--every time EURUSD approached this 1.4260 level in the past few weeks, sellers have disappeared. This morning was only the latest example of this.

An alpha-beta-delta impulsive up move in October 2009, ending within one pip of the 2.618 target.

Here's how it played out:

• An alpha high at 0.8857 on October 1, then a beta low the following day at 0.8566, creating an alpha-beta base of 291 pips.
• 2.618 times that 291 pips would call for an impulsive rally of aprroximately 761 pips.
• On October 21 AUDUSD tops out at 0.9326, 760 pips above the beta low.

After that October 21 high we entered a long corrective period which possibly ended right before Christmas with a low on December 23 of 0.8732.

Two observations about that long corrective period:--

• First, it unfolded in a 3 wave pattern, with a slightly irregular Y (or B) wave. The last down wave (Z) ended on December 23. It was 10 pips shy of 1.618 times the first down wave (X).

• And second, the entire X-Y-Z corrective move retraced 78.6% of the impulsive move of October (within 3 pips).

Since the December 23 low we have seen a significant rally, retracing aprroximately 61.8% of the final Z down wave. But there will be no clear pattern until we see how any retracement of that rally unfolds.