I last covered the euro on 14 January - "Can the euro continue its rally?" - and since then, the answer has been a definite "yes".
On Jan 14, the euro was challenging the 1.34 level and bouncing off a tramline. The market overnight has succeeded in moving through 1.34 seethe current chart below.
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I now have my third tramline placed above the original pair I showed last time.It's not completely reliable with only two touch points so far.
(Click on the chart for a larger version)
The crucial Fibonacci 50% retrace of the big swing down off the 1.50 high in May 2011 to the 1.20 low in July 2012 lies directly ahead.
Note that this level at the 1.3480 area was major resistance in February last year, and lies only 40 pips away from the current market as I write.Here is the long-term view:
(Click on the chart for a larger version)
I have highlighted this zone of resistance.
If you glance at my first chart, you will see that we are approaching the crossing of the 50% level and my tramline (pink bar).There should be strong resistance here.
OK, now I have a possible scenario. And to add to the picture, there is a clear A-B-C form to the rally off last year's 1.20 low a potentially bearish sign.The key, of course, is in identifying where the C wave will end a tough assignment!
In addition, there is a potential negative-momentum divergence forming (red lines).
Building a case with COT data
Let's see if the Commitments of Traders(COT) data has anything to say about this.Here are the latest data as of 15 January:
Swipe to scroll horizontally
OPEN INTEREST: 211,373
COMMITMENTS
80,174
72,859
2,810
73,119
88,184
156,103
163,853
55,270
47,520
CHANGES FROM 01/08/13 (CHANGE IN OPEN INTEREST: 17,122)
13,845
-1,505
85
-4,182
20,355
9,748
18,935
7,374
-1,813
PERCENT OF OPEN INTEREST FOR EACH CATEGORY OF TRADERS
37.9
34.5
1.3
34.6
41.7
73.9
77.5
26.1
22.5
NUMBER OF TRADERS IN EACH CATEGORY (TOTAL TRADERS: 180)
56
50
22
46
49
110
113
Row 8 - Cell 7
Row 8 - Cell 8
This period covers the week up to 15 January just after my previous post.
The hedgies (non-commercials) have ramped up their bullish stance and the banks and trade (commercials) have massively increased their short stance.The small traders (non-reportables) have likewise increased their long positions.
Following that data point, the market swung down around 150 pips in its consolidation phase before moving back up.
The end result? The speculators ramped up their long positions in anticipation of the rally continuing.
So what are the odds of this occurring?
Time to look at the Elliott waves:
(Click on the chart for a larger version)
I mentioned before that it appears the rally off the 1.20 low is an A-B-C.
It is often found that when the C wave is extended, it reaches a Fibonacci 1.618 times the extent of the A wave.That would put the target at the 1.38 area for the turn.
Currently, the C wave is slightly longer than the A wave.I should also point out that equality too is a common Fibonacci relationship!
Not coincidentally, the 1.38 area is also the Fibonacci 62% retrace of the big wave down (see second chart).
That would be a terrific target, but it must first navigate the 50% resistance area just ahead.
But the trend is firmly up. That is the direction best traded.
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:
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John is is a British-born lapsed PhD physicist, who previously worked for Nasa on the Mars exploration team. He is a former commodity trading advisor with the US Commodities Futures Trading Commission, and worked in a boutique futures house in California in the 1980s.
He was a partner in one of the first futures newsletter advisory services, based in Washington DC, specialising in pork bellies and currencies. John is primarily a chart-reading trader, having cut his trading teeth in the days before PCs.
As well as his work in the financial world, he has launched, run and sold several 'real' businesses producing 'real' products.
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