Thursday, May 20, 2010

Euro: Classic Elliott Wave Patterns

I have rarely seen elliott wave patterns so clear as they have been in playing out over the past months in the EUR/USD pair.

I have always found that elliott wave is easiest to trade where volume and volatility are present. Volume is needed to capture the largest social mood patterns, and volatility to amplify the patterns so that it is easier to see in real time. As the heaviest traded currency pair in the world the EUR/USD meets the volume characteristic needed, and the volatility over the past months due to the sovereign debt crisis surely has amplified the patterns.

The moves over the past 24 hours since my last post are no exception. The market has moved almost precisely as Elliott guidelines and wave patterns would indicate. Anyone who doubts that Elliott wave cannot assisst in helping narrow the possibilities of where the market should head, or just simply believes that markets are entirely random and unpredictable needs to see the past few days charts.

Yesterday had us in a clear 5 wave pattern off new lows for the EUR/USD (new 4 year lows in fact). Elliott wave analysis indicated that we should see a correction back to the area of the previous fourth wave and toward the common fib retrace area starting at 38%... followed by at least another 5 wave rally to new highs in a wave c or 3.

Here is yesterday's chart:

Here is today's chart:

The wave ii or b low of just below 1.23 is both within the are of the previous 4th wave, and squarely in the fibonacci zone. More important, is that its wave structure was overlapping in its form and in 3 waves. This was a significant clue that made going long near these levels relatively easy with defined risk (for me, the max risk I was willing to take was the end of the fib zone near 68% retrace level, but a wave 11 or b could have gone all the way to test the low and still have been valid, albeit much less probable). The reward happened as elliott wave predicted in a wave 3 or c move up to new highs.

Wave 3 or c is either over or has one more pop up to new highs before it is complete. Warning to the bulls though that the move down on the ultra short term charts can be counted as impulsive, so caution is needed.
Once wave 3 or c is completed (if it is not already), it becomes critical to watch the pattern of how the market corrects the move... if impulsive in 5 waves down, the we likely head to new lows before another shot at rallying. If in 3 overlapping waves, then we indeed be in a 4th wave and headed back up to complete the 5th wave of the move off the lows. Should the latter happen, it would mean a larger rally was unfolding, after a 3 wave correction.

Time to watch carefully and plan the next strategic trade...

I will be at a conference all day tommorrow, so no posts until next week. Good luck to you all and be careful out there. Volatility and risk are back in full force! 

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