Has the euro topped in the charts?

When I last covered the euro, I noted that I was wrong in my short-term analysis. And I’m OK with that. Being wrong is a fact of life in trading. We are dealing with probabilities, not certainties. And we always have incomplete information which only comes to light later.

Successful trading is about losing as little as possible on your losers and making as much as possible on your winners. But when you do go wrong, it always helps to go back and see why it happened. That way, you can hopefully learn from your mistakes.

Where did I go wrong?

After studying the hourly chart again that I had on 14 February, I realised I may have been wrong in my tramline placement. This is the problem: on some charts, it is possible to find more than one valid tramline pair that fits the highs and lows.

But these alternative tramlines only come to light after we have made our first attempt. Let me show you what I mean – here is the chart I showed a week ago:

EUR/USD spread betting chart

I started with the lower tramline because the lows appeared to lie on or close to a straight line. If I could fit those onto a line with only small over- and under-shoots, I should have a reliable line of support. And if I could also have a prior pivot point (PPP), that would make it even more secure.

With this line in place, the next step was to look for the upper tramline. I found three accurate highs right away, but I had to cut off the extreme spike high to the 1.39 level in the process. With this, I believed I had a great tramline pair.

The tramline break on 14 February then gave me a signal to go long EUR/USD at around the 1.3680 level.

The euro is about to resume its bear trend

Call it instinct, but there was something telling me that this trade might not be a big winner, despite the clear tramline break buy signal. This is the longer-term picture:

EUR/USD spread betting chart

From the 1.50 high, the bear market down is in five clear impulsive waves to the July 2012 low at 1.20. Not only that, but the relief rally is in a clear A-B-C form – and the C wave high has carried to the Fibonacci 62% retrace. This is straight out of the Elliott wave textbook, where relief rallies most often turn at this 62% level.

The big picture is very clear: the euro is about to resume its bear trend.

This puts the short-term long euro trade in doubt as a longer-term prospect.


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Always be prepared to amend your tramlines

Can the short-term picture reveal any useful information? Here is the hourly chart as of this morning:

EUR/USD spread betting chart

With seven days’ trading action since my last post now available, I am able to draw in a new tramline pair. Now I have an even better PPP and two accurate touch points on my lower tramline.

But the interesting line is the upper tramline: it takes in the 1.39 spike high top! Now I do not have to cut off this spike high, as I did last time. The high on Wednesday is an accurate touch point which confirms the line as resistance.

This makes me much more comfortable with these tramlines. But I could only draw them given the trading action from the past week, which was obviously unavailable last time.

Remember, when using tramlines, you must be prepared to amend your lines in the light of current market action.

Are we about to see a decline?

If these new tramlines are valid, then this week’s rally to the upper tramline line of resistance was consistent. And if this high holds that would likely mean the trend has started down again.

It’s time to take a closer look because I see that the rally from early February has some interesting highs and lows that could be forming a useful pattern:

EUR/USD spread betting chart

Sure enough, I can draw a potential wedge on this rally – and I can label five clear Elliott waves to it. Wave 3 is not the longest wave, although it usually is. But so long as it is not the shortest, that is OK. Wave 5 is extended – and has five clear sub-waves complete with a large negative-momentum divergence.

Remember, a fifth wave is an ending wave.

This is now painting a very different picture to that given by my original tramline break. That indicated a long trade at the 1.3680 level and could have resulted in a profit to the 1.3780 Wednesday high, or at least a break-even trade.

But the longer-term potential trade now is to the downside. If my wedge pattern is accurate, a break of it should herald a swift decline to at least the start of the wedge at the 1.35 area.

What the COT data tells us

One of the data points I use when assessing the potential for a large move is that given by the COT (commitments of traders) data. Here is the latest set as of 11 February:

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
(Contracts of EUR 125,000) Open interest: 281,037
Commitments
75,048 81,977 7,684 157,239 131,888 239,971 221,549 41,066 59,488
Changes from 02/04/14 (Change in open interest: 6,891)
7,434 753 -1,289 -3,497 12,107 2,648 11,571 4,243 -4,680
Percent of open in terest for each category of traders
26.7 29.2 2.7 55.9 46.9 85.4 78.8 14.6 21.2
Number of traders in each category (Total traders: 183)
33 73 23 47 53 96 133

 

During the latest rally, both sets of specs (non-commercials and non-reportables) swung a very long way into the bullish camp (while the smart money commercials took the other side of those trades).

I am confident that there has been an even greater bullish swing since that data was published (the next data set is due out later today).

Trader attitudes towards the US dollar has been running bearish of late, as traders have wondered if the recent spate of disappointing US economic data would weaken the resolve of the Fed to continue tapering. It’s now a real possibility that the Fed will not be stopping their printing presses after all.

So with the build-up of bullish positions, the scene is set for a potential swift decline and a big bull move in the dollar.

• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:

The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together

• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here . If you have any queries regarding MoneyWeek Trader, please contact us here. [xyz_lbx_custom_shortcode id=11]

 

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