Corrective pattern – Forex Academy

Overview

The CADJPY cross advances mostly sideways in an incomplete triangle pattern. The corrective structure that remains in progress suggests the possibility of further upsides in the coming trading sessions.

Market Sentiment

The market sentiment on the CADJPY cross looks neutral, although during the overnight trading session, although the US presidential election is driving up volatility.

The following daily chart shows the long-term market participants’ sentiment unfolded between the 52-week high and low range. The figure reveals the price action currently moving on the neutral zone, which moves near the level of 79.274.

In this context, the neutral sentiment is confirmed by the sideways channel, which began in early June, and the price action moving below the 60-day moving average Nevertheless, the bullish wide range candle of November 02nd leads to expect further upsides in the following weeks.

Technical Big Picture

The CADJPY cross moves in a sideways upward structure that belongs to an incomplete upward sequence that began last March 17th when the price found fresh buyers at 73.803.

The 2-day chart shown below illustrates the big picture of CADJPY under the Elliott Wave analysis perspective. The figure reveals the pair’s action advancing in an incomplete third wave of Minute degree labeled in black.

The consolidation structure of the CADJPY cross, in progress, suggests the possibility of a bullish continuation. Likewise, in terms of the Elliott Wave theory, if the current upward sequence corresponds to an incomplete impulsive sequence, the price could develop an extended wave. Nevertheless, a signal of confirmation of the potential new rally will occur if the price breaks and closes above the pivot level located at 79.823.

The short-term supports and resistance levels are as follows:

Resistance 1: 80.542
Resistance 2: 81.448
Resistance 3: 82.634

Pivot Level: 79.823

Support 1: 78.502
Support 2: 77.573
Support 3: 76.526

Short-term Technical Analysis Outlook

The CADJPY cross in its 4-hour chart unveils the course in a corrective structure that resembles a triangle pattern (subdivided into 3-3-3-3-3). This potential triangle pattern remains unfinished and could be developing its wave (d) of Minuette degree labeled in blue.

From the previous chart, both the breakout and close above the descending trendline connect the top of wave (b) of Minuette degree with the end of wave b identified in green as the close above the level 79.872 could confirm the turning bias from neutral to bullish.

The advance in its wave (d) identified in blue could find resistance between 81.448 and 81.909. Once the potential triangle pattern completes, the price could advance toward 84.739 and even extend its gains until 86.677.

Finally, the upward scenario’s invalidation level is located below the end of wave (a) of the Minuette degree labeled in blue.

Introduction

The 5-3 wave pattern is made up of the combination of 5-wave impulsive pattern and a 3-wave corrective pattern. The 5-wave pattern is inclined towards the predominant trend, while the 3-wave pattern is always against the trend. It is basically a pullback to the overall trend.

However, it does not end there. Within each wave in the impulsive and corrective waves, there is a set of other impulsive and corrective waves. And in that each smaller set of impulsive and corrective waves, there exists another miniature set of impulsive and corrective waves. This top-down approach goes on and on, forever.

The Top-down Approach

The Top-down approach can be considered as a synonym for fractals. In the Elliot wave theory, each wave is made of sub-waves and so on. In an uptrend, the 5-wave impulsive pattern faces upside. In these five waves, waves 1, 3, and 5 are towards the overall trend, while waves 2 and 4 against the trend.

In the same uptrend, the corrective wave pattern faces against the trend, where waves A and C face against the trend (downwards), and wave B faces towards the trend (upwards). In this sequence, there are five waves towards the overall trend (with two minor pullbacks) and three against the trend (with one minor pullback).

According to the fractal theory, each push up and push down has the above sequence. For instance, if we extract wave 1 and wave 2, then wave 1 will be made up of a 5-wave impulsive pattern, and wave 2 will be made up of a 3-wave corrective pattern. In conclusion, the combination of two waves (1 and 2) results in a set of 5-3 wave pattern. Refer to the below figure to get a clear understanding.

The Ordering and Labelling of Elliot Waves

We know that every wave can be broken into smaller waves and so on. But referring to these waves becomes the challenging part. So, to make simplify the labeling of these waves, Elliot has assigned a series of categories to the waves in terms of its size (from largest to the smallest).

Conclusion

We saw that every Elliot wave is made up of another miniature Elliot wave, and this break-down goes forever. But, according to Elliot, the degree identification is not a necessary factor in Elliot wave analysis. As a trader, our goal is not to assign the right degree to the wave pattern but to just understand the timeframe in which it is occurring. In the end, all that matters is the basic analysis of the wave theory. The identification of degree always remains secondary. Cheers.

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