The euro gives me three kisses against the dollar

Today I will follow the euro/dollar story, where trading has been directionless and many traders have had nightmares for the past 15 months or so. The swings have been violent at times – and yesterday provided just one more example.

In my post of 14 April, I outlined how I arrived at my upper target at the 1.1450 area, which the market duly hit on 7 April where I took final profits on my longs.

I pointed out that hedge funds were at near-record levels of bearishness against the dollar and I maintained that that setup was perfect for the onset of a dollar rally. And a rally duly occurred from the second hit on the 1.1450 region on 12 April:

EUR/USD spread betting chart

In fact, I was able to draw a terrific tramline pair across the topping process and when the lower tramline support gave way, I had a classic sell signal.

With the market now in a downtrend, I began counting the small scale waves to try to find a five down. Remember, when a clear mini five down occurs off a significant high (or low), that is usually a sign the trend has changed. Here, the correct strategy was to trade from the short side.

Here is the action as of yesterday afternoon:

EUR/USD spread betting chart

The decline off the 1.1450 high is in five waves – an impulsive sequence. That lead to the inevitable corrective rally and that took the market to the Fibonacci 62% retrace – a common turning point.

That area was also where the extension of the lower tramline passed through, which made it a region of extra-strong resistance. From the initial turn-down on Tuesday and Wednesday, the market made a third attempt to push above the resistance zone in a very rapid spike rally, but was turned back down yesterday in a sharp retreat.

I confess I have rarely seen three kisses on a tramline and this one is for the books.

This morning, the market is taking a breather after that frantic action that shocked both the bulls and the bears.

But how does all this busy action fit into the larger picture? My main view has been that after the current corrective rally wears out, the market will descend to test the 1.06 lows.

But there is a viable alternative wave count, and here it is:

EUR/USD spread betting chart

The 1.06 low made last March is the final fifth wave of a five down. The only problem with this count is that there is no momentum divergence between waves 3 and 5, which is something I like to see as evidence that selling is drying up.

Nevertheless, the trendless action since then can be considered a series of threes.

So where are we today in this picture? One idea is that we are at the end of red wave c of purple wave C, which implies a move back down. Or red wave c may not have completed and will extend higher above the purple wave A high at the 1.17 area.

Because I have no real clear outstanding view, I am content to maintain my short positions with stops at break even, fully prepared for a possible rally to take me out (with zero loss).