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Chinese Yuan and Elliott Waves

The Elliott Wave Principle helps you anticipate, not just react

by Alexandra Lienhard
Updated: January 06, 2017

Chris Carolan, who edits our Asian-Pacific Short Term Update, explains how the Elliott Wave Principle helped him anticipate the recent move in the Chinese yuan.

Alexandra Lienhard: When looking at moves in the Chinese yuan, it often appears that the market is risk-averse. When the dollar strengthens, the Asian FX markets weaken -- and then the yuan weakens to keep the currency basket stable. Now, this is a traditional way of looking at things, the negative feedback loop. However, in a recent Asian-Pacific Short Term Update, Chris Carolan, Elliott Wave International's Global Opportunities Expert, showed that there's another way to look at these currency moves.

Chris, tell me about what the charts were telling you on Tuesday [January 3] when you put out that video forecast for your subscribers.

Chris Carolan: Hi Alexandra. Well, we were focusing on our bread-and-butter methodology, the Elliott Wave Principle. We use some other indicators to support it, but this was a case where the Elliott waves really had a strong message. Elliott waves have markets progress in five waves (impulsive) moves, followed by three wave (corrective) moves. So, when you can count that a market is in a fifth wave, you know that you can anticipate a reversal point.

Now, the other interesting facet of the Elliott wave is that it works in many different degrees of the trend. If a market is within a fifth wave, that wave itself breaks down into smaller-degree five waves. So, if you can then zoom in and see -- alright, this fifth wave is in its fifth wave -- then the message becomes stronger, as you have two degrees of that analysis to present.
What we saw on Tuesday was that the Chinese yuan, the dollar rally against the yuan, was in a wave five of wave five of wave five -- so we really had this setup at three degrees of depth, as we call it. We knew that we were very close to an important high in the yuan, or the dollar versus the yuan, so we were expecting a sharp reversal in a major move. And then we saw that reversal Wednesday and Thursday, as the yuan rallied sharply and the dollar reversed rather dramatically.

Alexandra: From everything you just explained, Chris, you nailed this call. I feel like your video from Tuesday is a really great example that demonstrates the Wave Principle's strength in being anticipatory, rather than reactionary -- so I thought it would be nice to share this video with our viewers.

Chris: [Editor's note: Video recorded on January 3, 2017.] Hi, this is Chris Carolan, editor of the Asian-Pacific Short Term Update for Tuesday January 3. I'd like to talk about the Chinese yuan today, as it's continued its strong run. We've been very bullish for --well, years now, actually -- but something concerns me, and I think I need to look at a possible top forming soon. Two things: were starting to run out of momentum on the Jurik RSX, you can see the that it's starting to roll over. But this 84 reading, this is an extremely strong trend, so we have to be careful in anticipating a top, but it would seem that one is on the way, so to speak.

I think, the other thing that's interesting is there's this very nice triangle here. This is a very elegant triangle. This is an impulse wave. This really must be four, implying that it's one, two down here, three, four, and we're in an extended fifth.

Let's look at the daily chart. Here's the daily chart showing both offshore and onshore yuan prices and the spread between them is showing the weaker offshore exchange rate as driver of this dollar rally and yuan deceleration. From an Elliott-wave standpoint, here's our count: one, two three, here's that very nice triangle, four, and we go one, two, three, four from there. The implication is we're now in wave five of five of five. It's probably increasingly dangerous to be too bearish on the yuan here. It suggests we're coming into a potential top.

On the monthly chart, the very long term, remember our initial target off of here was the previous fourth wave, we've met that, we've exceeded it, we're now closing in on the Fibonacci 38.2% retracement of the entire yuan multi-decade rally from the 90s. 7.07 on the onshore rate, potential resistance -- but again, here's another one, this is an extremely high Jurik reading and on a monthly chart. The trend is very strong. It certainly has enough momentum to continue higher, but this idea that we're in a fifth of a fifth of a fifth possibly tells us it's time to turn more cautious on the yuan, on this dollar rally with the yuan, potentially running out of steam here. That's today's update, I'll talk to you later.

Alexandra: Well, Chris, thanks for taking a couple of minutes to talk today and offer these insights. And by the way, nice call on China!

Chris: Thank you, Alexandra.