The euro is trading beautifully against the dollar

On 8 January, I was tracking the progress of the EUR/USD. I forecast the downward move as a five-wave pattern. This was the chart:

EUR/USD spread betting chart

So far, the move off the 1.39 spike high is in four waves. What I was looking for was a final fifth wave down to terminate close to 1.35 at the Fibonacci 62% level. Let’s see how this has played out:

EUR/USD spread betting chart

I did get my fifth wave. In a textbook move, it carried to the 1.3550 area and on a large positive-momentum divergence (red bar). But it didn’t quite carry to the Fibonacci 62% level. Since that does happen, we must be alert to these near-misses.

Knowing when to exit

Incidentally, it never ceases to amaze me how often we do get accurate hits on the Fibonacci levels. In terms of real life trading, it is best to allow the market some room for a possible near-miss and to exit the market just before your exact target. You may give up a few ticks, but I would rather do that and ensure my profit.

If you religiously stick with your exact Fibonacci level as your exit, you may see the market just fail to hit it. The market then moves against you and takes away your hard-earned profit. Don’t let that happen to you!

Could this be a major move up?

When my fifth wave was in, the market made a solid relief rally. which is still in progress. The question is: could this be the start of a major move up or will the relief rally run out of steam with the market going on to new lows?

Let’s back up a little and see where the market is positioned in the larger picture:

EUR/USD spread betting chart

The upper tramline pair is the one I showed last time. And with the tramline break, I could draw in my third (lowest) tramline equidistant. This tramline now offers a short-term price target. And lo and behold, the market dropped to the new tramline and turned back up from that support line. Isn’t that pretty?

A short trade taken at the tramline break and exited near the lowest tramline would have produced a gain of 100-150 pips.

No-man’s land

OK, now the market is between tramlines and in no-man’s-land. After a tramline break, the market often attempts a kiss back on the underside of the line. That would take the market up to the 1.38 area again and provide another shorting opportunity. But is there enough buying power left to get it there?

The alternative is for the market to test the lower tramline and eventually break below it. Remember, the current rally is totally expected after the five waves down. Although it can be viewed as a three-wave affair, it is not a totally convincing A-B-C.

It’s time to back up even more and look at the bigger picture:

EUR/USD spread betting chart

Here is my large wedge pattern where the trend lines are converging and the market is very close to the lower line. When markets move out of their wedge, they often move very swiftly, which places the area just under the lower line as my danger zone (for the bulls).

And with the clear five waves down just completed on the hourly chart, the main trend is very likely down.