Elliott Wave analysis is different from other types of technical analysis, because it puts everything into context. No head & shoulders patterns just hanging there in space. No trading based solely on support and resistance levels. Every move in Elliott Wave analysis derives from the previous one and leads to the next. That’s the beauty of it. And the current sharp surge in USDCAD is no exception.
The pair exceeded 1.3860 on March 10th, but the bulls lost momentum and allowed for a notable bearish reversal to occur. Just over a month later, the US dollar barely held above 1.3300 against its Canadian counterpart. Following such a big decline of over 560 pips, one could be forgiven for extrapolating the downtrend even further. A quick look at the pair’s 4-hour chart, however, was enough to give us a pause.
We shared the chart above with our EW Pro subscribers on April 12th. It revealed that the selloff from 1.3862 was an almost complete five-wave impulse. We labeled it i-ii-iii-iv-v, where the fifth wave was supposed to make a new low. According to the theory, every impulse is followed by a correction in the other direction. So, it was this pattern that gave birth to the current sharp recovery.
Wave ‘v’ ended at 1.3301. At that point, nearly everyone who was going to go short had already done it. Traders were likely waiting for USDCAD to continue its fall. The problem is that the price cannot keep falling if everyone has already sold. In the absence of new sellers, the bears lose patience and close their short positions. Then, naturally, the rate heads north instead.
The good news is that we don’t have to ask what everyone is thinking at any given time. The market is the best possible approximation of the crowd’s thoughts. It is constantly giving us hints through it price patterns. All we have to do is look.