The euro finds support as sentiment plummets

No need to wait for the European Central Bank announcement on Thursday, says John C Burford. Elliott wave theory tells you all you need to know.

I was away last week and since I last wrote, markets have given us some impressive moves, proving that a week is a long time in finance and sometimes, conditions can change even in one day. In fact, last Thursday was just such an occasion when it was all-change in the currency markets with the US dollar suddenly reversing its bull run.

In my last poston the euro on 26 February, I flagged this dollar decline as a high probability event.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

And with the avidly-anticipated European Central Bank (ECB)meeting looming on 10 March, where boss Mario Draghi is fully expected to crank up the 'stimulus' machine of more quantitative easing (QE) money-printing and even lower the policy interest rate further into negative territory. That was the overwhelming consensus view and one I was likely to challenge.

I had been tracking EUR/USD down off its major top at 1.1360 on 11 February and was looking for a turn. I had identified a likely minor low with the hit on the meeting of the tramline and the Fibonacci 62% support level. Here is the chart I showed:


The market was also entering chart congestion from the December-January period which I expected to provide some support. That area was a good place to take at least partial profits on short trades, as I pointed out.

Advertisement - Article continues below

But the decline had not stopped there with the market moving lower to break my lower pink tramline to take it deeper into the congestion zone. It was then that I sensed that the inevitable rebound was going to be sharp. The selling had to be intense to take the market well below my pink tramline with an associated increase in short bets placed by speculators (which would be revealed by the latest Commitments of traders (COT) data).

Sure enough, that is precisely what the COT data shows. This is the snapshot as of last Tuesday (only released on Friday) two days before the fateful snap-back rally:

Non-commercialCommercialTotalNon-reportable positions
(Contracts of EUR 125,000)Open interest: 503,904
Changes from 02/23/16 (Change in open interest: 6,180)
Percent of open in terest for each category of traders
Number of traders in each category (Total traders: 241)

Both hedge funds (non-commercials) and small traders (non-reportables) massively increased their short bets in the previous week (while the smart money commercials took the other side of that bet). The bear trap had been sprung.

And this is the result here is the updated hourly chart:


With a huge momentum divergence forming last week, the market broke cleanly above my blue trendline on Thursday and rocketed up in a massive short squeeze for a 200-pip two-day gain. Short-term traders were delighted.

But on Friday, the market hit major resistance with a traditional tramline kiss which also was the Fibonacci 38% resistance level.

Advertisement - Article continues below

So this morning, the shorts must be wondering what happened and is their assumption that Draghi will serve to drive the euro lower on Thursday still valid, even though a 'stimulus' package may well be unveiled?

There is little doubt that much of the selling off the 1.1360 high was done by traders who took the party line that whenever central banks engage in "stimulus", it must weaken the currency (that is their intent, after all). In four days, this theory will be put to the test (again).

But the omens are not good. In January, Japan unleashed its historic stimulus and drove its policy rate into the negative for the first time ever. And what did the yen do? It rose strongly in the following weeks. That was a great example of a "buy the rumour, sell the news" trade and was contrary to received "wisdom".

But has last week's sharp euro rally changed the immediate outlook? Here is a close-up of the hourly:


In fact, the rally possesses a classic five up with a long and strong wave 3, a fifth wave to new highs (which itself contains a nice five up), and a momentum divergence at the wave 5 high. This is entirely textbook and heralds a major change in direction.

And if the textbook examples are to be maintained, I expect a pull-back in an A-B-C form to take the market to at least into the marked orangezone, which is the region of the wave 4 low (a common target for A-B-C pull-backs).

Advertisement - Article continues below

One of the major advantages of using the Elliott wave theory is that it offers a high probability roadmap for the market to follow in all time scales. Here, I have shown that the new five up, which usually signals a change of trend when it appears after a lengthy decline, is hinting that the new trend for the euro is up.

But at least until Thursday, the market will remain highly volatile.




Trading: you can be sure of Shell

Oil won’t stay low forever – and Anglo-Dutch oil giant Shell looks both lean and cheap.
5 Apr 2020
Spread betting

Build profits with this industrial equipment rentals company

United Rentals is poised to benefit from higher spending on infrastructure. Matthew Partridge explains the best way to play it.
26 Feb 2020
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
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

Most Popular


House prices and Covid-19

The housing market is in deep freeze – what happens when it thaws out?
5 Apr 2020
Global Economy

Who’s going to pay for the war on coronavirus?

Central banks and governments are throwing money at coronavirus to stem the pandemic and prop up their economies. But who's actually footing the bill?…
6 Apr 2020

What does the coronavirus crisis mean for UK house prices?

With the whole country in lockdown, the UK property market is closed for business. John Stepek looks at what that means for UK house prices, housebuil…
27 Mar 2020

Three things matter for the UK housing market now – and “location” isn’t one of them

The UK housing market is frozen. And when it does eventually thaw out, the traditional factors that drive prices will no longer apply. The day of reck…
1 Apr 2020