December Commentary

Following up from last month, let's look at the Canadian versus the US dollar. We said that price had to retrace down to 8150 to confirm a peak, well that is done! We had concentrated on the roman numbers and the parenthesised numbers. The next level up in size is displayed in circled numbers and we can appreciate that this move was very strong so the correction was equally strong with a gap down. Our analysis should focus on two scenarios. The first one could be that the December (a) wave is another pre extension wave. This scenario would require a 1.3% trough to be equally a 2.1% and a 3.4% trough. This is unlikely but we need to ascertain that the price retracement from the peak of 8500 is at least 3.4% (so far we know the retracement up confirms it is at least 1.3%). The peak was at 8500 exactly and the trough is at 8066, a difference of 5.1%! So the unlikely is one step closer to be a reality. We must turn to other indicators to see if any would back this possibility. The demand index is useless on forex because my data provider (yours may be OK) has inadequate volume information. I must use RSI and Stochastic even if their accuracy is poor for picking tops or bottoms. Fortunately we have trend line set on the RSI, the thick green line in the pane immediately below price; it shows where the RSI must cross to exhibit real momentum. The Elliott oscillator is also turning around as the last bar is a smaller negative value than the previous one. This alone is not convincing but it confirms that the scenario is viable.

                                                                      

Click on the image to enlarge.

The second scenario is the continuation of the down trend after a small (b) wave correction. This hypothesis is easier to visualize because we know that the price should go up but not beyond the previous peak (8500). So, how much will you say? Our Fibonacci projection says between 38.2% and 61.8% of the previous wave (a), that is from 166 to 268 from 8066. If price moves above these levels, it could continue on its way up as depicted in the first case. If not , then price will fall to the 7850 or lower in 78 bars from November 8 as we said last month. What are the arguments in favour of this second case? The RSI and the Stochastic are not good at picking the bottom so they may hover in the oversold area for a while. The Elliott oscillator is only one bar better, tomorrow could be another day. The final argument is (from a technical analysis standpoint) a wave (b) usually follows a wave (a). The price dropped below a 55 bars moving average, a first since June 2004.

To conclude I will add that a correction from the peak could go as low as the roman peak v in August 2004 and, to remain a correction, it cannot enter the wave x territory. If it does break that last support, we have a bearish impulsion that will take us in a different land! My choice is scenario 1 because the Elliott oscillator has not gone down enough for a material correction. Please feel free to e-mail your own views to the webmaster address.