Trade this 7-year cycle

October 17, 2016 09:00 AM
Since the end of the Bretton Woods era, the South African Rand (USD/ZAR) has more or less gone straight up with notable peaks in 2001 and 2008, which are seven years apart (see “7-year cycle”).

 

Since the end of the Bretton Woods era, the South African Rand (USD/ZAR) has more or less gone straight up with notable peaks in 2001 and 2008, which are seven years apart (see “7-year cycle” below). Work backwards in seven-year cycles and you’ll notice that 1987, 1980 and 1973 are pivot lows (1994 was nothing). The decline from 2001 lasted three years and the decline from 2008 lasted two years. So even though 2015 falls seven years after 2008 and appears to show a peak, it’s possible that 2016 is the first year of another decline.

Trading "blow-off" tops

The tops in 2001, 2008 and 2015/6 are “blow-off” tops.  The blow-off portions of the rallies occur following breaks through the top of a channel. Once the market comes back into the channel, a reversal is considered underway toward the point from which the blow-off advance originated. This point is defined as the level where price last touched the support line. The circles on the chart denote the origin points. The target in this case is 10.90.    

Those technicians that tell you a three-wave decline must be a completed correction are trying to fit theory to reality, or are lazy and don’t care to look at actual historical market examples. There are countless examples of larger turns that begin with three waves.  In fact, the declines from the 2001 and 2008 highs started as three-wave declines.

The USD/ZAR currency pair fell in three waves from December 2001 to June 2002 and then rallied in three waves from June 2002 to August 2002. Weakness then accelerated through 2004.  

USD/ZAR fell in three waves from October 2008 to January 2009 and then rallied in three waves from January 2009 to March 2009. Weakness then accelerated through 2010.  

USD/ZAR fell in three waves from January 2016 to August 2016. By the second week of September, the USD/ZAR had turned up from its August low and then turned down from former channel resistance turned support, and back to resistance again.  In other words, a three-wave rally may be underway.

There are more similarities with price action since January, and with  price action following the December 2001 top. A trendline, 200-day average combination served as resistance after the 2001 high. At the moment, the 200-day average and trendline are near 15.03. 
 
Drawing trendlines is easy so we rarely think about their meaning, but this is a good time to do so (see “Three peaks” below). A trendline is an angle that results from price and time. Markets respond to angles for an undetermined amount of time until they do something else, at which point we know that the market has experienced a change in behavior. A behavior change can mean a lot of things, including a change in the angle of ascent or descent, or even a change in direction. The market knows its angle and it’s up to us to find it. Drawing lines from spike highs/lows that are the result of illiquid conditions doesn’t work because there wasn’t much of a market at that high or low. It’s not much different from drawing lines at points which the market never touched.  Practically speaking, they are simply too steep.

Look for the USD/ZAR to move back above 15.00 before beginning a more substantial move toward our target of 10.09; a substantial increase in the Rand over the dollar. The 2001 peak was in October, the 2008 peak in December, so the current peak is right on the 
seven-year cycle.

About the Author

Jamie Saettele, CMT, is Senior Technical Strategist for DailyFX and co-founder of sbtradedesk.com.