My charts got the euro bounce just right, but the next target won’t be easy

Today I want to cover the euro, which has been following my roadmap very closely. My euro trade is yet another example of how the basic ideas from the Elliott wave theory – correctly applied – allow for the confident (and profitable) prediction of trend changes.

I don’t know of any other method of technical analysis that can consistently do that for you.

My system perfectly predicted a euro bounce – the herd did not

In my post of 13 March, I was expecting a wave 4 up in an A-B-C form and then a final wave five down to new lows.

EUR/USD spread betting chart

Remember, my long-range target was in the 1.04 – 1.05 zone (see my Trader post of 6 March: “Two indicators are telling me the euro will bounce at 1.05”). That’s where I expected the final wave 5 to end, and a huge rally phase to begin.

Of course, this was very much against conventional thinking. But when the headlines in the mainstream media were all shouting that the euro was going to hit parity with the dollar – and beyond – it was clear to me that the end was nigh for the euro bears.

You will never see a headline such as “Dollar about to top out” while the market remains in a huge bull dollar move. Financial journalists – and most so-called gurus – do not get paid for correctly forecasting major turns with precise price levels or even time scales. But that does not mean such material is useless for a trader, as I have shown in these posts.

Most gurus and journalists are herd-followers, as are most traders. If the herd is ultra-bearish, the gurus and commentators will be too; that’s what sells papers. It is important for traders to understand that.

Hedge funds are also mainly trend-followers and are especially prone to moving with the herd. That is fine so long as the trend doesn’t change, but when it does, that’s when the fireworks are let off.

A look at the latest commitments of traders (COT) data will show exactly what I’m talking about. Hedge funds (non-commercials) have been running a large plurality of shorts over longs for many months as the euro market established a firm bearish trend.

Non-commercial Commercial Total Non-reportable positions
long short spreads long short long short long short
CONTRACTS OF EUR 125,000 Open interest: 449,508
Commitments
56,329 250,103 7,806 348,754 101,065 412,889 358,974 36,619 90,534
Changes from 10/3/15 (Change in open interest: -46,957)
-4,942 7,759 -17,385 -20,896 -35,105 -45,223 -44,731 -3,734 -2,226
Percent of open interest for each category of traders
12.5 55.6 1.7 77.6 22.5 91.9 79.9 8.1 20.1
Number of traders in each category (Total traders: 191)
49 103 30 48 57 112 176

 

As the market declined to the 1.05 area last Tuesday, the hedgies had increased their shorts/reduced their longs in anticipation of a bearish Fed report the next day; shorts outnumbered longs by almost five to one. That is extreme by any standard. Small traders were also bearish, almost three-to-one short.

So what happened? Following the Fed report, the market took off like a scalded cat and trapped the shorts. I did not get the higher wave 4 I had predicted, but the market did dip into a new wave 5 low at 1.0460 on Friday 13 March – and on a nice positive-momentum divergence (red bars).

EUR/USD spread betting chart

But look what happened on Wednesday evening – a mammoth rally sent the market up to well over 1.10, which was a gain of almost 600 pips off the low.

What a kick-off to the short squeeze I was looking for!

With that action, I felt justified in labelling the head and shoulders pattern with the neckline shown in green.

On Thursday, the market retreated back to the neckline, kissed it – a great opportunity to cover all shorts and go long – and took off on Friday in a scalded-cat bounce (this is a trademark pattern I look for after a kiss).

I want a little more information, so I’m going to look at the picture using my own trading system: Fibonacci, tramlines and Elliott waves.

My tramlines marked the euro downturn to the pip

So, the charts show us that the large wave 5 is now complete with its own five down. But what’s remarkable is that the spike to the 1.1040 high on Wednesday halted at the exact point where the Fibonacci 62% retrace and T3 (my third tramline) meet.

EUR/USD spread betting chart

That combination always means heavy resistance, and so it proved. What a perfectly textbook example of my methods!

Very short-term traders could have used this knowledge and taken profits near the high – if they were watching the Fibs and tramlines, that is.

Incidentally, when you become a member of the Trade for Profit Academy, I will give you a good grounding in all of these techniques.

Anyway, let’s look at the big picture and apply my model on a larger scale. 

I’ve set a bullish euro target, but the path won’t be smooth 

The daily chart going back to last year shows that, with the new low on 13 March in my target zone, I have a valid complete five-wave count off the 1.40 high, with wave 5 itself sporting five complete waves. My first major target now is the Fibonacci 50% retrace to the 1.22 area. Of course, it won’t be plain sailing to get there. As usual, there will be thrills and spills.

EUR/USD spread betting chart

You can be sure that when the rally does finally top out, the headlines will be screaming “Dollar is heading for complete collapse as it freefalls”, or even “Dollar is worthless junk, say traders”. Even today, when the dollar has rallied by over 20% in a few months, I still read articles proclaiming the death of the dollar, as if we are still in 2012-2014.

That is when bearish dollar sentiment will be in single figures and the COT data will be reversed.

That is how markets work. And that’s how we make our money.