The euro rallies to my new tramline

I thought I would send you a brief note on the euro, following my article yesterday, which was written before the news hit the market that the US cavalry is riding to the rescue of the European banks.

You can learn more about what the Fed’s doing by reading my colleague John Stepek’s piece on the intervention here: The best way to protect yourself as the Fed wades into Europe.

My beat is to look at this from a trading perspective.

Yesterday, I had a short trade working. But when the market reversed course, I was taken out at my stop, as indicated in yesterday’s article.

This proved to me that my original A-B-C analysis was wrong. Was it possible that a larger-scale upward correction is taking place?

I have been observing all along that following the move down to the critical 1.32 level last Friday, any relief rally would need to ‘look right’ – in other words, it would need to have a size proportional to the decline off the 1.42 high on 27 October.

This decline of only 250 pips occurred over four weeks, and so my projected rally should be of at least several days’ duration. Today is the fourth day of the rally. On the face of it, this is too short, and thus I expect more work to come above 1.32.

Discovering a new tramline

Here is the latest chart:

Euro vs US dollar spread betting chart

(Click on the chart for a larger version)

My old upper tramline was penetrated on yesterday’s rally. Recall that I was very unsure of this one, and so my doubts were confirmed.

I can now draw in my new tramline, which takes in the highs of last Wednesday and Friday. This looks much better.

Yesterday’s rally to the 1.35 area (the upper end of my initial target – see yesterday’s article) took it right to my new tramline. Nice.

So let’s take a closer look:

Euro vs US dollar spread betting chart

(Click on the chart for a larger version)

I can now draw in a new A-B-C pattern – the old ones have been consumed by the larger-scale waves, which is typical behaviour.

Here are the Fibonacci retracements off the previous significant high:

Euro vs US dollar spread betting chart

(Click on the chart for a larger version)

A fresh short trade presents itself

So, if this is the final A-B-C pattern, I can assume yesterday’s high is the final high, and I can now start to look for another short trade – and I have one!

There has been a shallow dip off the 1.35 high, and the market is currently moving up off this dip. But note how the dip stopped right at the level of the previous high from yesterday (my former wave C!).

Again, this is typical chart behaviour. I have marked this support with the purple bar in the earlier chart (which I’ve repeated below).

Euro vs US dollar spread betting chart

(Click on the chart for a larger version)

If the market can move down below this small-scale support, that would be bearish. And that is where I will place my order to short. If this order is filled, my protective stop will be just above yesterday’s high.

Was I disappointed by yesterday’s loss? No. I had followed all my trading rules and placed a sensible stop-loss. That is all any trader can do.

The rally off the “surprise” news is enabling me to position another trade at a higher level, thereby potentially offering me a larger profit if the market can break below 1.32.

But I will allow for the possibility that the market may rally further – after all, we are only four days into this move.

On Monday, I will cover the Dow, which has seen a very large reaction to yesterday’s developments.

• 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:

Advanced trading with Elliott waves

An introduction to Elliott wave theory

Trading with ‘momentum’

The essentials of tramline trading

Advanced tramline trading

Trading with Fibonacci levels

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