Less than a month ago USD/CNH rose to 6.9621 and it looked like reaching a new multi-year high above 7.0000 was only a matter of time. Unfortunately for the bulls, the market chose otherwise.
USD/CNH fell to 6.8164 on the last day of June. As of this writing, the pair is hovering around 6.8755 following recovery to 6.9003 yesterday. In order to see what can be expected from now on, let’s take a look at the recent weakness through the prism of the Elliott Wave principle.
The hourly chart of USD/CNH reveals that the drop from 6.9621 to 6.8164 is actually a clear five-wave impulse pattern. It is labeled 1-2-3-4-5 in wave (1/A), where the sub-waves of wave 3 are also visible.
This tells us two things: one, the recovery to 6.9003 must be part of the corresponding three-wave correction in wave (2/B); and two, once wave (2/B) is over, more weakness in wave (3/C) should be anticipated. The level beyond which this count will no longer be valid is the starting point of wave (1/A) at 6.9621.
The odds remain in the bears’ favor as long as USD/CNH trades below this key level. Since wave (3/C) is supposed to exceed the bottom of wave (1/A), targets below 6.8164 make sense.