It has been over two months since our last article about USD/MXN. On July 27th, the Forex pair was trading slightly above 18.6150. The Elliott Wave Principle then suggested “a corrective rally to 19.50 – 20.00 is about to interrupt the downtrend in the near future.”
The logic behind our optimism was simple: there was a perfect five-wave impulse to the downside from 20.96 to 18.58. According to the theory, a three-wave correction in the opposite direction follows every impulse. Elliott wave analysis is best understood visually, so let’s take a look at the chart below to refresh our memory.
Ah, right, there was also a bullish RSI divergence between waves 3 and 5 of (1/A), which further supported the short-term positive outlook. On the other hand, once the anticipated recovery in wave (2/B) was over, the entire 5-3 wave cycle would be complete. The bears were supposed to return shortly after. Today is October 1st and here is an updated chart of USDMXN.
Wave (1/A) extended its slide to 18.4046 by August 7th. And just when it seemed like nothing can stop the pair’s selloff, the bulls suddenly came back. Wave (2/B) developed as a simple a-b-c zigzag and lifted the U.S. dollar to 19.6868 against the Mexican Peso on September 5th.
Unfortunately for the bulls, wave (2/B) did not even last a whole month. As of this writing, USDMXN is hovering around 18.50 and is approaching the support area of wave 5 of (1/A). Support and resistance levels can be quite useful in trading, but traders relying on this particular support to lift USDMXN may be up for an unpleasant surprise.
Since wave (1/A) was a five-wave impulse, wave (3/C) should also evolve into one. The support line drawn through the lows of waves 5 of (1/A) and “b” of (2/B) has already been breached and turned into resistance by waves 1 and 2 of (3/C). This means the pair is most likely in wave 3 of (3/C) now.
Third waves are usually the fastest and strongest phase of the impulse pattern, which means 18.50 is probably not going to hold the bears much longer. USDMXN can be expected to keep losing ground and eventually plunge to the 17.0000 mark in the weeks ahead.