Two indicators are telling me the euro will bounce at 1.05

Since I wrote Wednesday’s post, the euro has crashed below my wave 3 low at 1.11, and confirmed my Elliott wave count:

EUR/USD spread betting chart

The market is now well and truly in a final fifth wave. But how low can it stretch?

There is one little-known feature of a classic motive five-wave pattern: in a genuine, extensive third wave, such as we have here, the waves start out from a high as bulls start to become disenchanted with their position and abandon their trades.

Remember, near the 1.40 high, bullish sentiment was dominant; as the market started to drop, this degree of bullishness was only reduced gradually as more bullish traders realised they were on the wrong side of the market.

As the third wave got into gear in the summer, the decline became steeper (July–September 2014 period). The bulls and the bears were becoming more evenly matched.

By September, however, bullish sentiment was a mere fraction of that at the top and the market became choppier with large rallies.

When the penny dropped, so did the markets

In the period from September to December, the market finally ‘got it’; many of the bulls had a light bulb moment where they finally realised the trend was really down and not up.

I call that the ‘period of decision’ and it usually occurs about half way along wave 3 as measured from the top.

If you look closely, you will find that the choppy period of decision does indeed lie about half way along wave 3:

EUR/USD spread betting chart

Halfway down wave 3, the market is darting up and down in wider swings than before, or after. This shows the market is unsure about direction and it took about two and a half months to make up its mind. This was a very tricky period in which to trade.

When traders finally made up their collective mind, the market went hard down to the wave 3 low in January.

That help explains my wave 3 low at 1.11.

How long will the euro keep falling?

So, we know a little more about why the euro reached that low. But the big question remains: how low will wave 5 go? If we get an extended fifth wave – a fairly common experience in the currencies – it may reach parity, which is a target I have seen mentioned.

Let’s go back to the very long-term chart for possible clues:

EUR/USD spread betting chart

This is a very interesting chart. I have drawn in a tramline pair stretching over many years, and it is the lower tramline that grabs my attention.

I have a pair of prior pivot points (PPPs) and three highly accurate touch points (purple arrows). Just admire how beautifully the PPPs and the lows line up precisely on the tramline over a period of almost nine years. This is utterly textbook.

So, where does the tramline project to? If the market does reach the lower tramline in the final fifth wave, it will hit the 1.05 area. And if it overshoots, it could come close to the magic level of parity.

There is another very interesting feature of this long-range chart. Notice the gap at the start of the year; it is a breakaway gap, a well-established feature in classical charting (though rare in today’s 24-hour markets).

Breakaway gaps usually occur about half-way along a trend. So, if we measure from the 1.40 high to the mid-point of the gap at around 1.22, that projects a target around 1.04 – very close to the 1.05 tramline target.

I’ve two independent targets at the 1.04 – 1.05 area. How very interesting!