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ELLIOTT WAVE ANALYSIS OF GBP/USD

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GBPUSD has been steadily declining since July, 2014, when it topped at
1.7190. Following the British referendum, which showed Britain wants to leave
the European Union, the pair recorded its biggest one-day drop ever by crashing
from 1.5016 to as low as 1.3226 in less than 8 hours on Friday, June 24th, 2016.
The “flash crash” made it plunge even more to 1.1739 in October. This is the
lowest GBPUSD has fallen to in over 31 years so the question is, now what? Last
week, the pair opened at 1.2402 and after a recovery to 1.2569, settled at
1.2457 for the weekend. Let’s see what the Elliott Wave principle1 has to say
now. A weekly chart of GBPUSD is given below.

X
The monthly chart of GBPUSD shows the whole development since the
start of the Great Recession in 2007. Between November 2007 and January
2009, GBPUSD plunged from 2.1160 to as low as 1.3502. The speed, sharpness
and structure of this huge decline allow us to count it as a five-wave impulse2
and label it as wave A-circled. According to the theory, every impulse is followed

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by a three-wave correction in the opposite direction. And, as the chart shows, it
did not take long for wave B-circled to begin. It developed as a (W)-(X)-(Y)
double zig-zag correction and lasted over five years - until July, 2014.
Once the 5-3 wave cycle, marked as A-circled-B-circled was over, wave C-
circled started and, as the weekly chart suggests, is still in progress. It seems
that the “flash crash” was wave V of (III), which means the current recovery is
part of wave (IV) to the upside.
But weekly charts should be used only for determining the general
direction of the trend. Let’s go into the details and see what the daily chart of
GBPUSD has to show. It is given below.

X
I thought wave C-circled is going to develop as an ending diagonal3, but
the pattern lost its contracting shape and now looks more like a regular impulse
in progress, which confirms the overall bearish outlook.
Wave (I) appears to be a leading diagonal, followed by a W-X-Y double zig-
zag in wave (II). Wave I of (III) is a regular impulse, which precedes an A-B-C flat
correction in wave II. The post-Brexit slump is marked as wave III, followed by a
triangle in wave IV and a “flash-crash” wave V to complete the entire wave (III).

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 It is also worth mentioning that wave (III) equals exactly 161.8% the
length of wave (I).
So, it follows that wave (IV) up has begun. Typically, it should be expected
to climb back up to the level of the previous fourth wave – IV of (III). This means
the area between 23.6% and 38.2% Fibonacci levels4, both of which typical for
fourth wave retracements, is likely to be visited.
The first of them – 23.6% - has already been touched and I think the pair
does not have the momentum to keep going, in order to reach 38.2%.
According to the rule of alternation, wave (II) is a sharp W-X-Y double zig-zag, so
wave (IV) could be expected to be a sideways correction, typically a triangle.
In this case, 23.6% should be enough, because triangles extend more in time
than they do in terms of price. If so, the rally to 1.2774 is wave A, the decline to
1.1987 is wave B, the recent rally to 1.2706 is wave C and wave D down is now
in progress.
Let’s continue with the 4-hour chart, in order to see how wave (IV) looks
like so far.

O
The recovery, which followed the “flash crash”, is a (w)-(x)-(y) double zig-
zag in wave A of (IV). Within a triangle, each wave has a three-wave structure.

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Wave B could also be seen as a double zig-zag, while wave C is a simple (a)-(b)-
(c) zig-zag.
Then, the most recent weakness from 1.2706 to 1.2346 is supposed to be
the start – wave (a) - of wave D down, which has the potential to drag GBPUSD
back down to 1.2100 again. In this respect, 1.2706 could serve as an
invalidation level5 for this count. As long as it holds, more downside is in the
cards in wave (c) of D.
But what if it does not hold? The alternative count below shows what
happens then.

O
Instead of a triangle, wave (IV) could turn out to be a W-X-Y double zig-
zag, where wave Y is now under construction in the form of a smaller (w)-(x)-(y)
pattern. The rally from 1.1987 to 1.2706 should be wave (w), meaning wave (x)
of Y is currently developing. It should still drag the pair lower, but not as low as
if it was a D-wave of a triangle.
If the market chooses this scenario, we could still expected the slump to
continue, but the area near 1.2300 might provide support for the start of wave
(y) of Y to the north, which is going to reach 1.2800, at least.
However, this is just an alternative. I would stick to the primary triangle
idea for now.

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 In conclusion, GBPUSD’s long-term downtrend is still under construction.
Besides, the daily and hourly charts also suggest more weakness should be
anticipated. As long as 1.2706 is intact, the bears’ first target is 1.2300, followed
by 1.2100.

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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