Jamie's Pick: 07/26/12
Suspicions that the AUDUSD rally from the 6/25 (9968) low was unfolding as a diagonal are being proved correct with price nearing last week’s high. Watch the i-iii line, which intersects the 100% extension of wave iii at 10520 on Monday. Theoretically, the AUDUSD shouldn’t exceed 10520 (if this indeed a diagonal) as doing so would make wave iii the shortest wave from 9968 and violate the rules of Elliott. Remember also that the advance from June 1 is probably wave D of a triangle. The implications being that the next big move is lower in wave E below parity.
The anticipated reversal has materialized in the EURUSD and we can now focus on how far the rally is likely to extend. Elliott wave guidelines state that wave 4 often alternates with wave 2 of the same degree with respect to character. In other words, if wave 2 is sharp and simple then expect wave 4 to be shallow and complex. Wave 2 (13003-13384) was sharp (retracing 78.6% of wave 1) and simple (3 wave zigzag) thus we should expect wave 4 to be shallow and complex. Shallow means a 23.6%-38.2% retracement of wave 3. The corresponding levels are 12378 and 12570. Daily RSI will help us time the end of wave 4 as well but we’ll deal with that when appropriate.
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