The 1.32 level is key to the euro

It is uncanny and seems akin to magic when, by using a few basic principles of Elliott wave theory, a trader can forecast the next market moves with great accuracy – and see his forecast unfold before his eyes.

Most inexperienced traders feel they are at the mercy of market action. But when you have a roadmap, your confidence multiplies.

When it comes to recent action in the euro, not only did I forecast the shape of the rally off the 1.32 support level (which I also forecast!), but I gave the likely turning point of the rally.

Here is what I wrote on Monday: “So, at present, my best guess is for my wave C to be put in, then a drop, but not to new lows under 1.32. Then, a bigger rally to perhaps the 1.34 – 1.35 area, where there is significant congestion resistance. That would be another great place to short.”

My initial A-B-C pattern I considered too small to be the final story and I expected a larger one to develop before finally topping out. This is exactly what has been occurring.

Trader Tip: I would urge all traders to be familiar with at least the basic concepts of Elliott wave theory and I give a tutorial on how I use it in my work.

Let’s look at the tramlines

This is the chart as I write:

EUR / USD spread betting chart

(Click on the chart for a larger version)

I have a very clear larger A-B-C and the market is currently falling back. I will return to this chart a bit later.

Let’s have a look at the larger picture to see where this A-B-C pattern fits in.

Here is the hourly chart:

EUR / USD spread betting chart

(Click on the chart for a larger version)

I have drawn in my tramlines off the 27 October high. The lower one is terrific – with many good touch-points. The upper is less secure, as you can see.

I am hoping I will not have to refer to this one again!

Overnight, the market rallied to 1.3450 (exactly mid-way between my 1.34 – 1.35 upper target zone) and touched my upper tramline (marked by yellow arrow) before falling back. There is evidently strong resistance on this line.

So where to now for the euro?

Let’s now go back to my first chart. I can now draw up-sloping tramlines containing market action of this rally. These tramlines have superb touch-points – they are textbook!

EUR / USD spread betting chart

(Click on the chart for a larger version)

But note what occurred in the region of the tramline crossings (marked by the two yellow arrows). The market in each case perfectly respected the support (lower cross) and resistance (upper cross).

If you come across a tramline cross, as here, it usually means extra-strong support (or resistance).

As I mentioned on Monday, this final C wave at the 1.3450 area was the place I wanted to short. The only problem was that the spike up to this high occurred late last night, when I was away from my screen.

But I have another entry – on a break of my lower tramline in the area marked by the pink bar under the B wave low. A break of this level would place the odds firmly towards the C wave high holding.

Let’s see where the market is as I write:

EUR / USD spread betting chart

(Click on the chart for a larger version)

In just a few minutes this morning, the market has broken below the B wave low and my entry order is touched.

Where to place my protective stop? Because the market has a tendency to rally back to the underside of my lower up-sloping tramline, a break up through it would invalidate my analysis and therefore I would wish to be out of the market.

In this case, I would take my loss and wait for another trade set-up.

I decided to place my stop at the area of the blue bar, just above the recent minor highs.

It appears the market is about to challenge the 1.32 support area again. A good break below this level would be very bearish, of course.

Don’t forget, the EUR/USD is in a large third Elliott wave down, which appears to me to have much more potential. But, as I say, I must always be alert to sharp counter-trend rallies. So far, the present rally is a fairly minor one – about 250 pips – and appears exhausted.

Position traders will be still holding their short positions, of course, as they are trading off these larger Elliott patterns – and waiting for that 1.32 break!

• 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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