Elliott Wave Called the Euro Collapse

11/11/2011 6:00 am EST

Focus: FOREX

Proper application of Elliott Wave analysis helped traders to predict the recent 300-pip down move in the EUR/USD currency pair two days before it actually materialized.

On November 9, the EUR/USD (exchange rate between the euro and US dollar and the world’s most traded forex pair) fell some 300 pips; a three-cent gain by the dollar.

The euro selloff was universally attributed to the bad news about Italian debt. And while that sounds reasonable, could you have anticipated this euro weakness before the news?

Yes, you could have.

See related: Be Ready for Major Euro Event

Here’s an intraday forecast made by a trader who follows Elliott wave counts from Monday, November 7—two days before the Italian debt implosion:

chart
Click to Enlarge

EUR/USD (Intraday)

Last Price: 1.3776

There are alternate counts available, but given the overlapping rise from 1.3609, all [wave counts] lead to euro weakness. The question is whether 1.3877 is exceeded first. Another three-wave bounce, this time from 1.3682, keeps the euro under pressure. The bearish outlook stands.

NEXT: See Factors That Made This Forecast Possible

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What made this forecast possible? Elliott wave patterns in market charts reflect the collective mindset of the market players. Their mindset is either bullish or bearish. The bearish-looking wave patterns on November 7 showed that the euro was likely headed lower.

The forex market took the November 9 news from Italy as an excuse to start selling. But it could’ve just as easily been any other news report—or no news at all—as the market’s mindset was clearly bearish as early as Monday.

The forex market is a fantastic place to learn how to count Elliott Wave and use it to forecast price patterns independent of fundamental news. The forex markets love to surprise traders because there’s no way to follow the news 24 hours a day. Elliott Wave will help you avoid the surprises and focus specifically on chart patterns.

Two months ago, the US dollar went from the global currency world’s "sh**" list to its glowing "it" list. Between September 1 and September 30, the dollar enjoyed a powerful rally against the euro to its highest level in nine months.
At the time, the mainstream experts tied the dollar’s uptrend directly to "investors re-remembering" the currency’s "safe-haven" status. The problem is, those same investors also "re-forget" said status every time the dollar falls right alongside negative economic news from the US.

As for the consistent explanation behind the dollar’s September rally, for a few months now, Elliott Wave traders have been tracking the June-to-August contracting triangle Elliott wave pattern in the US dollar charts.

A contracting triangle is a sideways move containing five waves labeled A-B-C-D-E. Once a triangle is complete, it is expected to be followed by a swift "thrust" in the direction of the larger trend.

The dollar’s September rally to nine-month highs was that very post-triangle "thrust." You can see it "upside down" in this chart of the EUR/USD. It is "upside down" because when the US dollar rallies, the EUR/USD forex pair falls.

chart
Click to Enlarge

Now comes the super-exciting part. You just saw how the resolution of a months-long contracting triangle can lead to newsworthy move. What about a years-long Elliott Wave triangle?

Look again at the dollar chart above and you can see the converging trend lines of a larger contracting triangle underway. This massive pattern could have equally massive implications for the buck.

See related: Major US Dollar Rally Is Coming

By Vadim Pokhlebkin of Elliott Wave International

Learn more about Elliott Wave trading strategies here.

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