I have a good friend who is a professional magician. He can do amazing things with playing cards, cups and balls, metal rings and chains, and ropes with knots. I can be standing right next to him, and he still fools me.
Of course, it is all illusion and sleight of hand. But even with that knowledge, I can still be fooled.
The markets work in the same way. They fool you into believing you understand them, and then they turn unexpectedly.
Investors want to believe that they can figure out the market. They want to believe that with enough fundamental information about a company, for example, they can figure out where its share price is heading.
But the market doesn’t work like that. The market doesn’t behave predictably, like snooker balls on a table.
In the real world, markets are moved by changes in investor sentiment, as I have shown time after time in these posts. And these changes in sentiment are patterned according to the Elliott wave model.
The worst forecast of the last ten years
One of the most notorious examples of how ‘logical’ forecasts were blown out of the water is the US dollar after the credit crunch. In response to the crisis, the US Federal Reserve started its massive programme of dollar-printing (known as QE, or quantitative easing) and cut interest rates to zero. That was in 2008.
The conventional wisdom was very clear: it said that the dollar was going to plunge in value relative to currencies where QE was not operating.
So, what actually happened?
As the QE (money printing) got under way, the dollar started to rally, and today, it is up big time from the low. That wasn’t in the script!
At the time, everybody else was concerned with the economics of money printing. But I was looking at the sentiment indicators, which measured how positive or negative traders were feeling. That gave me a much more reliable view of the market.
In 2008, bearish sentiment was at a record extreme. So the dollar had only one way to go – up.
It’s happening again – this time with euro qe
This same story may be playing out right now in a completely different market: the euro/dollar.
At the moment, everyone is down on the euro. It’s even being called a ‘failed currency’, as Greece eyes up the exits and the European Central Bank (ECB) begins its own money-printing programme.
But we’ve just seen how the conventional wisdom can be wrong at times such as these. So is the euro set for a mammoth rally?
Just like with the dollar in 2008, a massive rally would fly in the face of conventional wisdom.
But as you know by now, trading against conventional wisdom is where the big profits are. Is it time to bet against the crowd, which believes the euro is about to fall?
Here is the hourly chart of EUR/USD going back to the low of €1.11 on the 25 January this year:
The rally to the 1.15 high (shown as A or 1 on the chart) was the start of my first Elliott wave A-B-C pattern. The dip to the Fibonacci 62% retrace (which is highlighted in the horizontal pink bar) was wave B or 2 (purple) and now we are moving up in wave C or 3.
If the market can punch above the 1.15 level, it should be off to the races – and confound those who still believe QE is the kiss of death for a currency.