Last Friday, I demonstrated how I was able to successfully forecast a bounce at 1.05 after a stupendous one-way crash off last May's 1.40 high. Yesterday was the very first decent up day since 5 February, 24trading days ago (almost five weeks).
Subscribe to MoneyWeek
Subscribe to MoneyWeek today and get your first six magazine issues absolutely FREE
With the market headed straight down, the chorus of euro bears was becoming deafening; a whole raft of recent articles had confidently proclaimed that the euro would soon reach parity with the dollar.
Now, as a born contrarian, my eyebrows start to rise when I read this kind of talk. It reminds me of 1985, when the pound was in a very similar state crashing towards parity against the dollar after yet another sterling crisis. As it headed ever closer, the chorus became shriller as if to cheer on a racehorse they had backed to win.
Of course, parity was never reached, and the pound staged a monumental rally off the $1.0345 low (which remains its all-time bottom). The confident shorts were well and truly squeezed as they waited in vain for the parity that never came.
We'd do well to remember this piece of trading history when thinking about the current EUR/USD crash scenario. History suggests that we might be about to see the end of the crash, and I have another clue that says the same thing.
My perfect long-term tramline confirmed my suspicions
Isn't it uncanny how this can happen over such a long time period? Markets have long memories.
I hit my target range of 1.04 1.05; that's why I took partial profits yesterday in both EUR/USD and GBP/USD.
Note that I took partial profits only. In fact, I was using my wonderful split-bet strategy.
This strategy is so simple, but so very useful. It's a strategy most traders can use to advantage.
I took partial profits on both my EUR/USD trade and on my short GBP/USD trade.
I was short EUR/USD going into yesterday's hit on the 1.05 target. I decided to exit one half of my position there and left the remainder open. That meant I banked a very large profit on one half of my position a very satisfactory result.
Splitting a bet that way gives you great peace of mind; you know you have banked a large profit that the market cannot take away. Is it worth gambling' on more possible gains to come with a full position, rather than seek comfort in money in the bank?
Each trader must answer this for themselves.
What's next for the EUR/USD?
Do I have any clues as to which scenario will pan out?
Here is the hourly chart; I have my Elliott waves set out with the one-way crash to yesterday's low as my long and strong wave 3:
As of this morning, the market is staging a rally in what I believe is wave 4. If it follows the normal pattern, we should have a three up A-B-C form as marked (not necessarily to scale, though).
Following my wave 4, we should see a new low in wave 5 to below the 1.05 level. That is the ideal scenario.
Will it reach closer to my 1.04 level the lower bound of my original target zone?
The next few days will be crucial in helping me decide whether a bigger rally is in store.
Remember, bear markets always terminate when bearish sentiment is elevated, which it clearly is at present. In fact, the latest DSI (Daily Sentiment Index) showed a 97% bullish dollar reading this week.
Euro bulls are an endangered species, outnumbered 33 to one by bears. Clearly, conditions are ripe for a massive shock sometime soon.
When that shock arrives, traders will be mighty glad to have taken scaled-in profits on the way down.
For the moment, though, I suspect at least a major pause here the Dollar Index has just rallied to the round-number 100 level. Round numbers are often significant as areas of resistance.
Stay tuned...
Sign up for MoneyWeek's newsletters
Get the latest financial news, insights and expert analysis from our award-winning MoneyWeek team, to help you understand what really matters when it comes to your finances.
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.
Annual house price growth halves to 3.5% – ONS
Nationwide pays £100 to millions of people – have you received the payment?
