The euro heads lower – but for how much longer?

Today, I want to follow up on the euro story from last Monday, because there is an enhanced likelihood of a major low forming this week.

One reason for saying this is the latest sentiment readings. The AAII sentiment survey of professional money managers shows bullish sentiment towards the euro matching its previous record low of 4%. That is about as low as can be reasonably expected in an honest survey of a large number of advisors.

Remember, record low sentiment readings can persist for a period before a turn occurs. But with the Elliott wave picture showing signs of a maturing downtrend, I believe the turn is nigh (see later).

Incidentally, measures of sentiment often turn down from extremes ahead of market turns.

For a trader, this turn will be well worth catching, because it promises to evolve into a multi-week affair yielding several hundred pips.

There is no doubt that because deflation is stalking the global economy, the authorities in many countries are outdoing themselves in seeing how fast they can devalue their currencies to try to maintain a competitive advantage. Japan sticks out like a sore thumb in this regard with a resurgence of their massive QE  (quantitative easing) campaigns.

Also, the European Central Bank has been dropping hints for months about staging their own QE scheme. The race to the bottom is on! But it won’t be all one-way.

Even with the media – remember, they are the last to notice that a particular trend is in force – plastering major bullish dollar stories into the papers, everyone is now convinced the dollar has only one way to go – up. Where were they earlier this year when we needed them before the dollar rally?

Of course, we know that these are the ideal conditions for a major surprise.

My preferred Elliott wave count

Here is the updated version of the daily chart I showed last Monday:

EUR/USD spread betting chart

We are currently in wave 5 down and in the fifth sub-wave of that wave. Let’s take a closer look at wave 5:

EUR/USD spread betting chart

The large red wave 5 has five sub-waves (purple) and we are in the fifth sub-wave. Intriguingly, there is a large budding positive-momentum divergence building on this four-hourly chart.

The market is about to challenge my tramline

Also last week, I showed my tramlines on the hourly chart. Here they are on this updated chart:

EUR/USD spread betting chart

The tramlines are validated by the kisses and subsequent scalded-cat bounces down to the next tramline underneath. Now the market is about to challenge my fifth tramline. If it makes it, there will be support at the 1.22 area.

But this level is another support zone which I can derive from another independent method. This time, I have to go back to the long-term charts.

Here is the weekly chart going back to 2005:

EUR/USD spread betting chart

I have a terrific nine-year-old support line with three very accurate touch points. The market is currently a fraction away from this line. Also note the budding positive-momentum divergence – a sure sign the selling force is being dissipated on the way down.

The benefit of being a small-time trader as the euro heads lower

As a measure of the extreme bullishness of the market, here is a chart of the net long dollar futures positions held by hedge funds:

Net long dollar futures chart

(Chart courtesy www.elliottwave.com

The record high number of bets for the dollar is a stark warning to the army of dollar bulls.

Remember, hedge funds are almost always caught flat-footed at major turns holding huge positions. That is because they are mostly trend-followers and because of their size and governance are unable to reverse their stance, unlike us lucky small traders!

What a wonderfully appropriate place for a major turn at the nine-year support line! The market is trading 50-100 pips away from this line as I write. If the market can trade below the 1.22 level in the next few hours, there is every likelihood that we shall see a spike move down and then up. This is a typical currency reversal pattern following a major trend.

I have specific trade entry strategies for handling this situation, which I will explore in upcoming post. Be sure to watch out for them.