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ELLIOTT WAVE ANALYSIS OF AUD/USDPremium analysis giveaway | 31st October 2016

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Hello

Thank you for choosing EWM Interactive.

The good old days of July 2011, when the AUDUSD pair was flying around

1.1080, seem to be long-forgotten. Five years later, last week the rate closed at

0.7598 after declining from 0.7708. Could the recent strength be the start of

something bigger or it is just another temporary correction within the larger

downtrend? Just as the fundamentals failed to warn us about the upcoming

weakness in 2011, I believe they are not going to help us now as well. That is

why I prefer applying the Elliott Wave principle to the charts of AUDUSD and 1

see if it could give us a hint. The best way to start a wave analysis is by looking

at the big picture first. So, let’s begin with the monthly chart given below.

Between the mid-1970s and 2011, AUDUSD has drawn a 5-3 wave cycle

to the downside. The structure of wave III-circled is clearly visible, while wave V-

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circled is an ending diagonal. Naturally, once the impulsive decline was over 2

below 0.5000, a three-wave recovery took the pair to the 2011 highs.

All this means that the larger downtrend has resumed and the decline

from 1.1080 to 0.6826 is likely to extend even lower. In the long term, the

bears should be able to reach a new all-time low beneath 0.4829.

But there is no way to trade, based on a monthly chart, so we need to

move on to the smaller time frames. The weekly chart will show us the structure

of the post-2011 weakness.

The decline from 1.1080 does not have a five-wave structure yet, but I

believe it is a matter of time. It seems that AUDUSD is currently forming its wave

(IV) to the upside. Wave (I) is a leading diagonal, while the sub-waves of wave

(III) are easy to count as well.

Fourth waves usually retrace back to the 38.2% Fibonacci level of the 3

previous third wave. AUDUSD’s wave (IV) has already reached this barrier, but it

seems to me that the bulls are going to test it once more, before wave (V) to the

south begins.

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If this is the correct count, we should see a slight breach above 0.7835,

followed by a bearish reversal. The daily chart below will explain why this is the

most likely outlook.

As you can see, the rally between 0.6826 and 0.7835 could be counted as

a five-wave impulse. Impulses show the direction of the larger sequence, which

means that, at least in the short run, higher levels could be expected.

In addition, there is a rising trend line, drawn through the lows of waves

(III) and B of (IV), which seems to be providing strong support , too. As long as 4

this line holds, I assume AUDUSD is now advancing for an ending diagonal in 5

wave C of (IV).

Each wave within an ending diagonal has a three-wave structure, which

means that the price action will probably get very slow and choppy as the rally

progresses.

Now let’s see if the hourly chart will provide us with a concrete trade

setup and key level.

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What we are looking at on the hourly chart is the first two out of three

waves – a- and b-circled - within wave 3 of C. Wave a-circled qualifies as a five-

wave impulse. Then wave b-circled is an (a)-(b)-(c) zig-zag correction with

another diagonal in wave (c). The rest of the price action should be waves (i)

and (ii) of c-circled.

Wave (i) has a clear five-wave structure, followed by a nice three-wave a-

b-c decline in wave (ii), which has been developing between the parallel lines of

a corrective channel.

If this is the correct count, AUDUSD cannot decline below the bottom of

wave b-circled. Therefore, as long as the invalidation level at 0.7506 holds, the 6

bulls remain in the driving seat. The situation provides a good risk/reward ratio,

considering that targets above 0.7835 remain on the table.

But what if 0.7506 gives up and the bears drag the pair to new lows? In

this case, we will have to switch to the alternative count shown below.

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As long as 0.7734 holds, this possibility cannot be ruled out completely. It

suggests that wave 2 of the diagonal in wave C is still developing as an (a)-(b)-

(c) flat correction, whose wave (c) down is currently in progress.

So, if 0.7506 is taken out by the bears, we are likely to see the rate fall

further to the 61.8% Fibonacci level of wave 1 near 0.7370. That is why it is

important, in case you have a long position, to place a stop-loss level at 0.7506,

in order to prevent a bigger loss.

And now I want to show you a second alternative count. Not because I

think it is very probable, but because it is nevertheless possible. It is quite

unorthodox and I believe it has a slim chance of developing, but let’s see it

anyway.

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Wave B of (IV) could still be under construction. The good news is that

the invalidation level stays the same at 0.7734. This count suggests that wave

(b) of B is taking the shape of a w)-x)-y) corrective combination between a 7

simple zig-zag in wave w) and a triangle in wave y). The intervening wave x) only

occurs to connect the two.

If the market chooses this scenario, we should see a small recovery in

wave “e” of y) of (b), which should, however, stay below the high of wave “c” of

the same pattern at 0.7734. According to our primary count, the bulls should go

right through 0.7734 and continue to the north. But if they fail to breach it, the

bears’ first stop would be 0.7370. If this level gives up, too, the sell-off could be

expected to extend to 0.7140 in wave (c) of B. of (IV).

In conclusion, AUDUSD is in a multi-decade downtrend, which should

cause a plunge to historical lows in the long term. In the short run, however, the

bulls should be able to exceed 0.7835, before the bears return. 0.7506 and

0.7734 should be paid attention to.

Alex Vichev

EWM Interactive

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PLEASE, BE AWARE!Your capital is at risk! Trading and investing on the financial markets carries a significant risk of loss. Each material, shown in this material, is provided for educational purposes only. A perfect, 100% accurate method of analysis does not exist. The Elliott Wave Principle is not flawless as well. If you make a decision to trade or invest, based on the information from this material, you will be doing it at your own risk.

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