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Is the short EURCHF trade too crowded?
A weekly chart shows that an impulsive downside target has been met this week. The low late yesterday around 1.3160 was the 2.618 extended Fibonacci target of a base formed in March. We have rallied over 100 pips since then. A retest of that level, if it manages to hold, might lead to some surprising upside action.
A quick look at an 8 hour chart shows we have bounced off an impulsive "price pulse" target on the downside. This follows the completion of a higher order upside move shown in a post last Thursday.
Although we are bouncing here, this pattern could very well continue to develop. If so the next target on the downside would be right below 1.06.
Late Afternoon Update
An hourly chart to show how USDCHF has climbed internal Fibonacci levels since bouncing off the 2.618 target of the pattern shown above. It has come back about 50% of the distance between the 1.618 and 2.618 targets. The next internal level up, 61.8%, might be a decent level to attempt to get back in on the short side. Roughly around 1.1160.
Quickly, an update on the unfolding impulsive pattern up in EURUSD shown yesterday:
The 4.236 (phi to the 3rd power) Fibonacci target was achieved on Monday. Then on Tuesday and Wednesday price action oscillated around this level before heading higher yesterday.
On this 30 minute chart one can see the internal Fibonacci levels between the 4.236 target and the theoretical 6.854 (phi to the 4th power) target. Notice how price action since the impulsive rally yesterday morning has oscillated around the 38.2% level, with upside action largely confined by the 50% level and downside action confined by the 23.6% level.
A large impulsive move upward was completed on June 1, a 4.236 Fibonacci extension of a base formed in December 2009 and January 2010. Remarkably, the theoretical target was only 1 pip from the actual high of the move.
This week we have rapidly fallen back to the area of the 2.618 Fibonacci level.
As you can see on a daily chart, on the way up the market powered through this 2.618 level, fell back below it, then oscillated around it for a few days. For this reason it is quite likely we shall see some support in this region.
Since the bottom made just below 1.19 in EURUSD during the Asian morning of Monday, June 7, price action has been spiraling up in a quite recognizable "price pulse," involving successive powers of 1.618.
A 2 hour chart shows this:
Notice how resistance came in initially around 1.2062 or the 1.618 extension on the 9th, then around 1.2150 or the 2.618 extension (1.618 to the 2nd power) on the 10th and the 11th, and then around 1.2292 or the 4.236 extension (1.618 to the 3rd power) this Monday. The next extension would be the 4th power of 1.618 (phi), 6.854. This would bring us to 1.2523.
Curiously, EURUSD is one market which seems to favor this pattern featuring such an extreme extension, that which is measured by the 4th power of 1.618. It has happened frequently over long time periods. The rise of EURUSD from late 2000 until the summer of 2007 can be seen as composed of 2 such extreme extended moves, both measured at almost exactly 6.854 times a base pattern. These two moves were separated by the dollar bull market in 2005.
A quick look at a 2 hour chart in AUDUSD, showing an impulsive upward pattern which has played out over the last week or so.
Where we are longer term:
A move to the 0.8730-0.8740 area would constitute a 50% retracement of the 3 wave corrective move from November of 2009 to May of this year.
A quick update on the pattern initally displayed in a post on Monday and updated yesterday.
As expected the area right above 1.2150 provided significant resistance. This chart shows the original "base pattern" from which the downward impulsive move was projected, but transposed upward from the 4.236 Fibonacci target around 1.1894. It is this level which has provided support for the weak counter trend rally we have been experiencing this week. As predicted in the post yesterday, the internal Fibonacci levels have been predictive in determining resistance levels in this rally.
As expected the area right above 1.2150 provided significant resistance. 1.2156 was the 0.618 Fibonacci level. The high today was 1.2152 right after the NY open and we have seen significant fall back since that time.
As can be seen on this hourly chart, a minor impulsive move to the upside completed itself in the first few hours of European trading this morning.
The 2.618 target was met mid-day New York time on Wednesday. This morning there was a brief spike above the 4.236 target right after the London open, but there was no close, even on a 30 minute chart, above the target level.
Most bears regard the rally in the S&P 500 from the March 2009 lows to the highs above 950 in June as the "legitimate" bear market rally. It is the rise from 870 in July of that year to the high around 1220 this April that has them shaking their heads. If we look at the internal Fibonacci levels of that part of the move up, rather than the total move from the lows in March, we find that the recent support the market has been getting above the 1040 level is right around the 50% retracement level. So, apart from this being the level of the January low, it is not surprising to find some upward pressure being released here.
The bounce we have seen today brought us back to the 38.2% Fibonacci level.
A quick update on the impulsive pattern detailed in a post on Monday.
The pattern showed a theoretical impulsive downward target at the 4.236 Fibonacci level for EURUSD at 1.1894. The implication was that this would be--at least for a time--support. And action since that time has seemed to confirm that pattern.
On a 4 hour chart, I have projected the length of the original alpha-beta base up from the theoretical target. Notice how the last impulsive move down was roughly equivalent to the length of the original base. And since the low during the Asian morning on Monday, price action initially stayed very close to the theoretical target, seemingly confined within a region bordered by the 0.236 Fibonacci level (within the projected base. Then yesterday we rose to a region around the 0,382 level. Since this chart was drawn we have risen above the 0.50 level. Do not be surprised if we find serious resistance around 1.2156 and 1.2318, levels equivalent to 0.618 and 1 times the original base level projected up from the theoretical support.
And one last chart, just to emphasize that the action since support held early Monday morning has not exactly been overly bullish. So it might be wise to consider a further downside target if and when this counter trend move ends. That target might be the next power of phi down--6.85 times the original base. That would take us to the region around 1.08 or a little lower.
Looking at a weekly chart in AUDUSD, we can see a Classic Elliott A-B-C corrective pattern, where the C wave ends at a level 1.618 times the length of A.
And looking at a daily chart, the C wave appears to have taken on a rough impulsive pattern, with a base formed by an alpha wave ending on May 6 and a beta wave ending on May 10, The subsequent impulsive delta wave would have a theoretical 2.618 target of 0.8109. The actual low of the impulsive wave on May 20 was below this level, at 0.8060, but this was initially a spike low, with an hourly close around 0.8120. Since that time most price action has ranged between the 1.618 and 2.618 levels of this downward impulsive formation.
Quickly, a few charts showing an impulsive pattern on the downside, with a 4.236 extended Fibonacci target near today's lows (from which we have bounced nicely). Notice how the previous target (2.618) first provided an area of support, and then, once broken, resistance.
First, a daily chart, showing only the major impulsive downside targets, from a base formation completed in April.
Then an 8 hour chart showing some minor Fibonacci internals within the larger targets.
Look for upside resistance near the initial high today (around 1.1990--1.2000), then at 1.2055, 1.2105 and major resistance at 1.2155.
The concept of the "price pulse" was developed by Tony Plummer in the 1980's while working at Hambros Bank and detailed in his book Forecasting Financial Markets . It is related to Elliott wave analysis and, indeed, might be seen as a less mechanical and more organic view of the same patterns Elliott studied. Plummer has said that nothing in the price pulse system contradicts Elliott wave analysis. The simpler components of his system can be used to construct the traditional Elliott patterns. The difference is that while Elliott patterns follow each other in a strict hierarchical and successive fashion (so that each primary five wave pattern is followed by a three wave retracement), the simpler price pulse of Plummer (three waves up) and its subsequent retracement (three waves down) can occur at different levels, overlaying and, in a sense, interfering with each other. So in a sense, Plummer's simpler structure shows the inner dynamics of Elliott's structure, the overlapping price pulse waves of higher degree interfering with lesser degree patterns to create the pattern Elliott saw .
Most traders using Fibonacci analysis use ratios less that one, primarily 0.618 and 0.382, to predict the extent of corrective waves. The price pulse begins with 1.618 (the primary Fibonacci ratio--the golden ratio or phi) and then computes powers of this number to predict targets for impulsive waves. This is related but in an important way different from what is often called Fibonacci "extensions." The difference is what is used as the "base" which is multiplied by the powers of phi. Plummer understood that it was not the original move up which should be computed as the base, but the subsequent corrective move, which he termed beta. The initial move up he referred to as the alpha wave. From the end of the beta move would come an impulsive delta wave, which should be targeted as some power of 1.618 times the distance of the beta wave.
Between 2005 and March of 2008 a very striking example of a long term alpha-beta-delta price pulse pattern unfolded in the spot Gold market. The extent of the impulsive or delta move corresponded to the theoretical targets to an astonishing degree.
From the summer of 2005 until May of 2006 spot gold had risen from the low 400's to a level around 730. This should be seen as the alpha wave. Subsequent there was sharp sell off back down to the 540 level. This was the beta wave. Using this initial pattern, once, in September of 2007, the price level rose above the initial alpha high, one could use powers of 1.618 to project delta target. Rising from the beta low, 1.618 times the distance between alpha and beta would be approximately 845.00. 2.618 times that distance would be approximately 1032.00.
As it happened, both targets came into play.
On November 7, 2007 spot gold peaked at 845.30, the exact 1.618 target. It came within ten cents of this level the next day but could not break through the 1.618 target level. By November 20, 2007 it had fallen by seventy dollars, the first serious correction since the impulsive move had gathered steam in August of that year. But then on the first trading day of 2008 it broke through that level. The implication was that it would now seek out the next price pulse target at 2.618 times the length of the base. That would theoretically be at 1032.40. On a Sunday evening in March of 2008, as the Asian markets opened, the spot gold market hit a high slightly above 1032.00 dollars. This was the weekend of the Bear Sterns debacle, when the Fed engineered the take over of the firm by JP Morgan Chase. It was a moment of absolute panic and it appeared to many that there was only one direction for the gold market, and that was to continue up to the sky. Instead there followed a seven month bear market in gold, which saw the price drop to a low around 680.00 in October. The gold market would not break through that March 2008 high until October of 2009.
Plummer has noted that often the end of a delta wave can become an alpha wave of the next move up. Assuming that March 2008 high was a new alpha and the October 2009 low was the end of the subsequent beta wave we can project the following pattern using a monthly chart.
The high on May 14 this year was ten cents above the theoretical 1.618 target. There followed a retracement of over eighty dollar.
But just as the previous retracement which occurred at this 1.618 level was followed, after a short and not very deep correction by a move up to the 2.618 target, we might logically expect the same to happen here. If this were to happen we would get a target of approximately 1600 dollars for the next move up.
