The euro’s on the move – but how far will it go?

The situation in Greece has settled down in recent days and it has virtually vanished from the front pages (until the next crisis, that is). Under the surface, the euro has been churning – and that has made it off-limits to me for new trades – until now. Now the euro is at an interesting juncture.

On 15 July, I noted the market was in a kind of no-man’s-land and between two important lines of support and resistance. This was the daily chart I had then:

EUR/USD spread betting chart

My tentative Elliott wave count suggested we were likely in a wave 5 down. But fourth waves can be exceedingly tricky and devious. Many traders are whipsawed to death by the zig-zag nature of fourth-wave trading. That is why I favour trading third waves – they are much more reliable and profitable.

I wasn’t entirely sure that the market would not make a new high in wave 4. The short-term wave count was very fuzzy. But my line in the sand was the lower wedge line. Breaking hard below that would give me much greater confidence in my labels.

The market did break the lower wedge line and was heading for the lower line that I had drawn off the March and April lows. If the market declined to that line, it would encounter good support.

EUR/USD spread betting chart

In fact, the market did decline following the break of the lower wedge line and proceeded to bounce up off it to plant a kiss on the underside of that line. That is pure textbook – and that kiss helped cement the pink wedge line as a solid line of support/resistance.

I was able to forecast that bounce days in advance. I had simply relied on the fact that by extending the line between the two major lows in March and April, I had a line of support which would reverse the market when it did hit it. That simple exercise is an invaluable tool to have in a trader’s kitbag.

Where will the euro go after this wedge?

So now the market is trading between two solid lines – the pink line is resistance while the lower line is support. At some point,  the market will break clear of these lines, but in the meantime it remains range-bound.

But are there any clues as to the likely direction out of the current range? On the hourly the bounce up from the lower wedge line has a clear A-B-C form (green lines) with a negative-momentum divergence. Also, the rally has carried to the Fibonacci 50% retrace of the previous wave down.

EUR/USD spread betting chart

That is good evidence that the rally has likely completed and a re-test of the lower wedge line may well be on the cards. Remember, a three-wave move is almost always counter-trend.

But there remains another possibility – and that is for a further rally up to the Fibonacci 62% level in an extension of the C wave. I have drawn in a possible tramline pair with the lower tramline only having one touch point, but it does have a good PPP (prior pivot point). My upper tramline has touch points as the major highs. If the market can rally from here, it would be heading for the crossing of the Fibonacci 62% and this upper tramline – a significant area of resistance.

EUR/USD spread betting chart

The rally off Tuesday’s low would still have the required A-B-C form to retain its counter-trend character.

Taking a chance on Fibonacci levels

Once more, we have a market that has rallied to the Fibonacci 50% – 62% zone and provides a classic dilemma for traders. Do you trade at or near the 50% level, or wait for a possible move to the 62% level? That is the question.

Sadly, there is no hard-and-fast rule here – you just have to pay your money and take your chances!

I prefer to trade at the 50% level and enter a close stop. If I am stopped out, then I take a small loss and wait for the market to (hopefully) rise to the 62% level and trade again there.

That way, I do not miss a possible big move by waiting for an event that might not happen. I would have wasted all the effort in researching the trade – and I hate wasted effort!

Finally, there is one thing traders need to keep in mind at all times – what is the main trend? If it is down (as it is in EUR/USD), then most of the time the way to trade is to be short. That is trading with the trend – a basic rule that is worth heeding.