Forget parity, I think we’re about to see a euro big rally

I’m following up on the euro story today because it is currently offering a magnificent example of how to put my tramline methods into action.

On Monday I described how I had stalked a long trade in EUR/USD at my C wave low (which dipped further than I had originally expected). My long entry was just below the 1.06 level and I had my protective stop 50 pips under that. As the market gathered strength, it traced out what I call a rising five wave zig zag. This is an interesting pattern that I have noted in similar situations.

EUR/USD spread betting chart

The market makes a new high, then suffers a sharp fall. It rallies above the previous high, dips again but not below the previous low and then pushes above the previous highs. On Monday, this latter move was hopefully up ahead. I have marked the waves of the zig zag in green, and my projection in red.

Now, this zig zag is not to be confused with the Elliott wave five wave motive pattern that I frequently describe in these posts.

This zig zag is a continuation pattern and the key feature is that the Monday low should not dip below the previous low of the pattern. If it did, that would turn the zig zag into an A-B-C corrective pattern which would herald new lows, not a rally phase.

On my Monday chart, I drew in my forecasted move up out of the pattern in red. That was my best guess as to the immediate move. Of course, I did not have certainty that this would occur! So how did my forecast work out?

Following the lovely kiss on my minor trendline, the market entered the zig zag and came out of it with a flourish up the 1.0850 area, which was an exact hit on the Fibonacci 62% retrace of the big C wave down.

EUR/USD spread betting chart

This was an area where short-term profits were available, as I outlined on Monday.

Longer term position traders would continue to hold their long trades taken just under the 1.06 area, of course.

Following that hit on the 62% retrace, the market did the expected and declined off that powerful resistance. The question on Friday was how deep the decline would be. Of course, there was no guarantee that the decline I had projected would not turn out to be a whopper, taking the market down into new lows.

After all, the news out of Greece appeared dire – the headlines that proclaimed the end game for bond defaults were getting louder with payment deadlines looming large.

Of course, most of the time, the market discounts the most extreme disaster scenarios – and so it appears with the euro.

So the question is: where will the dip end and the rally resume? This is where my tramline method comes into its own.

All my tramlines are suggesting a rally

I have a superb upper tramline with several prior pivot points (PPPs) and accurate touch points. That was my starting point. Then, I drew my parallel line to catch the lows.

EUR/USD spread betting chart

On Monday, the market broke below that tramline, rallied a little to plant a kiss on the underside of that tramline, and then declined. But where to?

Whenever I see a tramline break, my first task is to draw in my third tramline T3 equidistant from the first pair. That gives me my likely line of support where I can expect at least a major pause, and at best a turn.

The market duly obliged as it accurately hit T3 and then proceeded to rally. As I write, it is trading around 100 pips above this T3 low. That is major support!

Now looking at the bigger picture, the market is challenging major resistance at my upper tramline. My ongoing thesis is that we are at the start of a large five-wave rally and I have waves 1 and 2 in place. A break above the upper tramline would help validate idea that wave 3 has started. There should be a pile of buy stops around there.

EUR/USD spread betting chart

Naturally, this would surprise a lot of dollar bulls who are expecting the euro to implode as they believe contagion would spread after an imminent Greek exit. In fact, many expected the euro to decline below parity last month, but with bullish sentiment towards the euro reaching low single figures, I believed that was highly unlikely – at least in the near term.

So far, my trade is on the right track.