Last Wednesday, I covered the zigs and zags of the EUR/USD market in its very tricky wave 4 phase. I explained how fourth waves require extra special care and if you are not very careful, these waves can be a drag on your trading performance. In fact, I would say that they are the greatest traders’ graveyards of all waves.
In comparison, third waves are a doddle – if you can jump aboard early enough. These are like riding a tiger by its tail. You wake up and almost every day, you see another gain when you switch on. These are dream waves – and if you concentrated on finding only these potential third waves, you will have a very robust trading plan, provided you also have a solid money management regime.
This fourth wave in the euro has been operating since the March low of last year. And in that time, there have been only a few really great low-risk trade setups that have produced gains of several hundreds of pips. And last week, I showed the latest of these.
Here is the chart I showed last time:
Since December, the first great trade was going long at the start of the wedge on Draghi Day for a possible gain of 200–300 pips. Then a long wait while the wedge was quietly forming, and then the second great buy signal on 3 February as the market crashed up out of the wedge for another possible gain of 300–400 pips.
But the standout feature of the chart is the extreme accuracy of my upside target at 1.1360. I arrived at this target using three independent methods, as I explained last week.
To recap, these targets are:
• A hit on the Fibonacci 38% retrace of the wave down off the wave 2 high.
• A hit on the underside of a major tramline in a kiss.
• And equality of waves A and C.
My firm conclusion was that after hitting this target, the market would resume its decline in a new wave 5. I had found the top of wave 4 after a tortuous journey from the wave 3 low made back in March last year.
And this is the current hourly chart:
In the past week, the market has obliged by declining another 100–200 pips and now trades over 300 pips below the 1.1360 high.
The market is currently heading towards the extension of the blue upper wedge line, which now has become support (it was strong resistance while the market was trading within the wedge). That is my immediate target.
But that wedge contains a heck of a lot of congestion. That means any downside progress is likely to be likewise congested – and that means there should be some decent bounces where trades could be initiated.
How does all this fit into the bigger picture now?
Here is the weekly chart back to 2006:
These are the broad tramlines I see working with the lower line almost textbook. It has a superb set of prior pivot points (PPPs) in 2006 and three accurate touch points in the previous ten years.
Who says markets don’t have long memories? To doubters, just show them this chart. The latest bounce off lower tramline support in 2015 was precise – and occurred nine years after the PPPs.
But now with the market in retreat, my major target is back on that line. So depending on when it gets there will determine the target price level. If the market takes its time, the support will kick in at a lower level than otherwise.
But an eyeball reading puts that point at around parity. So that is my major target.