The euro extends its rally – for now

The euro has continued its rally - but for how long? John C Burford goes in search of an elusive market-top that could be the key to the answer.

We've been looking at the EUR/USD a lot lately. It's a fascinating market right now.

Next week, I'll aim to cover another market and it should start with the Dow on Monday.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Today, though, I want to stay with the euro and show you my latest analysis.

It illustrates an important principle while I attempt to understand the market's position vis vis the Elliott wave and tramline structure.

Advertisement
Advertisement - Article continues below

Recall from Wednesday that I had drawn in my best effort at identifying the Elliott wave and tramline structures in the rally off the mid-January low. This is the chart I showed then:

MWT-12-01-25-4x

(Click on the chart for a larger version)

I was not entirely happy with my label for the fifth wave, as the market had not made a clear high above wave 3. But I was giving it the benefit of the doubt.

Fed announcement sends the euro to new highs

Since writing that post, though, the market dipped below the lower tramline, and then rallied strongly to a new high yesterday (see next chart below). This was the clear new high I was hoping for, courtesy of the Fed.

Looking at it now, this could be my fifth wave to complete this part of the rally segment.

Advertisement
Advertisement - Article continues below

So I looked for a new set of tramlines and this is the result:

MWT-12-01-27-1

(Click on the chart for a larger version)

Right away, these are much more satisfactory than the previous pair.

This is the perfect illustration of an important trading principle. That is, how it's necessary to keep your eyes open for possibly better tramline placements.

I started with the centre tramline, which took in the 11 January low as well as the highs.

My parallel line below gratifyingly took in the two major lows and then my third upper tramline touches the 9 and 10 January highs.

Advertisement
Advertisement - Article continues below

Altogether, this is much better. Now I have a more certain Elliott wave labelling, as marked in my next chart. My new 4th wave is now the Wednesday low.

MWT-12-01-27-2

(Click on the chart for a larger version)

Note that my fifth wave rallied right to the centre tramline, and is backing off as I write. That was an ideal place to take profits on long positions, and possibly establish new short positions.

Trader tip: It is infinitely easier to find the best tramlines and Elliott wave labels on old charts than it is in real time at least, it is for me. The best you can do is to use what information you have at the time and make your best guess. If later trading action forces you to make changes so be it. Always pencil in your lines and labels and have your eraser handy.

Why the euro could decline in the short term

So, if my labels are correct, I can expect a decline, at least to the lower tramline in a probable A-B-C pattern. We already have a budding A and B wave forming as I write.

I believe more downside action is on the cards for the euro, though. This 550-pip rally has taken some froth off the extreme bearishness evident at the 16 January lows. But the market appears poised for a resumption of the downtrend for now at least.

Advertisement
Advertisement - Article continues below

But I shall be watching for signs of basing action likely centred around a Fibonacci retracement level. I will be placing my Fibonacci levels over the chart very soon.

I'll be back next week with more chart analysis. Don't miss it.

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:

The essentials of tramline trading Advanced tramline trading An introduction to Elliott wave theory Advanced trading with Elliott waves Trading with Fibonacci levels Trading with 'momentum' Putting it all together

Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just sign up here .

Advertisement

Recommended

Visit/trading/spread-betting/600782/boeings-share-price-plummets-heres-how-to-play-it
Spread betting

Boeing's share price plummets: here's how to play it

Boeing shares have fallen by a third this year. But there could be worse to come. Matthew Partridge explains how traders should play it
10 Feb 2020
Visit/519524/how-my-2019-spreadbetting-tips-fared
Share tips

How my 2019 spreadbetting tips fared

Matthew Partridge reviews performance of his 2019 spreadbetting tips. This year’s winners include Bellway, JD Sports and Taylor Wimpey.
17 Dec 2019
Visit/519285/bettingon-politics-some-safe-labour-bets
Spread betting

Betting on politics: some safe Labour bets

Matthew Partridge outlines a few flutters on what should be safe Labour seats in the general election.
10 Dec 2019
Visit/518916/ds-smith-will-deliver
Spread betting

DS Smith will deliver: here's how to play the share price

Packaging group DS Smith is profiting from the online retail boom. Matthew Partridge explains how traders can play the share price.
3 Dec 2019

Most Popular

Visit/investments/property/house-prices/600840/the-biggest-risk-facing-the-uk-housing-market-right-now
House prices

The biggest risk facing the UK housing market right now

For house prices to stagnate or even fall would be healthy for the property market, says John Stepek. But there is a distinct danger that isn't going …
17 Feb 2020
Visit/economy/600838/money-minute-monday-17-february-good-news-ahead-for-the-uk-economy
Economy

Money Minute Monday 17 February: good news ahead for the UK economy?

Today's Money Minute looks to a week in which we get the latest employment and inflation numbers, plus retail figures for January and a slew of eurozo…
17 Feb 2020
Visit/economy/uk-economy/600824/how-the-bbc-can-survive-the-end-of-the-tv-licence
UK Economy

How the BBC can survive the end of the TV licence

The TV licence that funds the BBC is looking way past its sell-by date, says Matthew Lynn. Here's how it could survive without it
16 Feb 2020
Visit/investments/stockmarkets/european-stockmarkets/600725/is-2020-the-year-for-european-small-cap
Sponsored

Is 2020 the year for European small-cap stocks?

SPONSORED CONTENT - Ollie Beckett, manager of the TR European Growth Trust, on why he believes European small-cap stocks are performing well.
12 Feb 2019