Advertisement

The euro follows my market roadmap

Using his chart-trading methods, John C Burford draws his roadmap for the euro, while managing the risks should the market run off course.

On Friday, I outlined the many reasons why I expected a significant high in the EUR/USD at the 1.38 level. It could even turn out to be a major high, which may not be breached for a long time. We shall see.

It is interesting to examine the psychology behind a rally at that level. This has to be done in the absence of updated COT (commitment of traders) data, which are still unavailable many days after government officials have returned to work.

Advertisement - Article continues below

The latest rally off the July low at the 1.28 area was centered on the belief that the eurozone economy was finally turning a corner, and that the European Central Bank was still showing no signs of starting their own quantitative easing programme, which would inevitably put pressure on the currency.

On the other side of the cross, the dollar was under pressure because of the negative mood surrounding the government shut-down, as well as the fractious debt ceiling drama, which once again highlighted the ballooning US national debt.

Advertisement
Advertisement - Article continues below

If you read the financial press and the many comments on blog posts, you will notice that a large cohort of the US public have an extremely negative attitude towards the dollar. But, then again, maybe it is only the doom-mongers that comment on blog posts.

This negative sentiment induced the large speculators, the hedge funds, to take an aggressive long position on EUR/USD. The last COT report of 22 October shows a ratio of over two-to-one large speculators were bullish.

Non-commercialCommercialTotalNon-reportable positions
longshortspreadslongshortlongshortlongshort
(Contracts of EUR 125,000)Open interest: 278,139
Commitments
137,06164,6275,76382,406153,006225,230223,39652,90954,743
Changes from 10/15/13 (Change in open interest: 20,940)
15,7343,674-279-2,07114,17113,38417,5667,5563,374
Percent of open interest for each category of traders
49.323.22.129.655.081.080.319.019.7
Number of traders in each category (Total traders: 196)
6056184852121113

Note that that date falls on the high water mark at the 1.38 area!

13-11-4-MWT-1

The importance of potential-momentum divergences

The chart shows that this occurred during the last final spurt up from the 1.35 area, and just in time for them to suffer in the reversal!

Advertisement - Article continues below

Now, with most of the bulls already committed, there was no more buying power remaining. Consequently, the market on Friday fell, as many of the 'last to the party' bulls were stopped out and the bears came out of hibernation.

On the above chart, one key indicator was the momentum reading, which was showing a potential negative divergence. This was cemented as the market declined.

You need to keep an eye out for potential momentum divergences when you suspect a trend is about to reverse. It is one of the most important factors I watch.

The Monday morning market

13-11-4-MWT-2

I have drawn in a new tramline trio. The upper one has two to three good PPPs (prior pivot points), and takes in the single touch point of the 19 September high (recall this is wave A of the A-B-C rally).

My centre tramline is a good fit to the lows, and I have drawn in my third tramline, which gives me a possible target.

Advertisement - Article continues below

I have also drawn in my Fibonacci levels, and the decline has taken the market to the 50% level a common support level.

And this is where the market is trading this morning.

Have the battle lines been drawn?

Elliott wave

13-11-4-MWT-3

This is the updated chart from Friday. If these labels are correct, then after the one-way wave 3 action, I expect a complex wave 4 up, where there should be much backing and filling over the next few hours.

Following the wave 4 high, I then expect a new move lower in wave 5 that should end at, or near, the lower tramline in the above chart.

This would set up a terrific battle, because it would occur in the area where the two major tramlines cross over:

13-11-4-MWT-4

(I have taken out the upper tramlines for clarity.)

Of course, a significant break of this crossover area would send the market much lower.

Mapping the markets

So you see how I use Fibonacci, Elliott waves and tramline analysis to draw a roadmap. And when the market follows it, it gives me confidence in my trade and in my targets.

But, as always, keeping to a sensible stop-loss policy is paramount, because sometimes the market ignores your roadmap and veers off in another direction.

Advertisement
Advertisement

Recommended

Short electric-truck maker Nikola, the Tesla wannabe
Spread betting

Short electric-truck maker Nikola, the Tesla wannabe

Nikola, the electric-lorry maker, has yet to produce any trucks – and the share price looks ripe for a fall.
29 Jun 2020
Trading: short this sickly looking health insurance broker
Trading

Trading: short this sickly looking health insurance broker

eHealth’s accounting seems too optimistic and regulators are circling, says Matthew Prtridge.
15 Jun 2020
Spread betting: five tips for would-be traders
Spread betting

Spread betting: five tips for would-be traders

Spread betting stocks can be tempting – but for many, it’s ruinous. Michael Taylor of Shifting Shares looks at how to avoid the pitfalls.
5 Jun 2020
Trading: Toast the rebound with Wetherspoon
Trading

Trading: Toast the rebound with Wetherspoon

Wetherspoon, the budget pub chain, is a disciplined and highly profitable operator whose shares now look reasonably priced.
2 Jun 2020

Most Popular

An economics lesson from my barber
Inflation

An economics lesson from my barber

On reopening his shop after lockdown, Dominic Frisby’s barber doubled his prices. It’s all part of the post-Covid inflation process – and we’re going …
8 Jul 2020
Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?
UK Economy

Can Rishi Sunak save the economy with stamp duty cuts and half-price meal deals?

John Stepek runs his eye over the chancellor's £30bn stimulus package and asks if it's enough to get the economy back on its feet after months of lock…
9 Jul 2020
A first-half home run for investment trusts
Sponsored

A first-half home run for investment trusts

The investment trust sector has seen some extraordinary performance in the first half of this year. Max King looks at what's behind it, and asks: is i…
7 Jul 2020