Is this a Head & Shoulders bottom in the euro?
Wednesday’s Fed rate hike and Thursday’s ECB hand-sitting produced some seemingly perverse moves in the dollar. The immediate action in the euro on Wednesday was to rally, despite the increased interest rate differential in the US’s favour. Odd.
Then on Thursday, Draghi did what he does best – nothing. Some may have expected him to follow Janet’s lead by raising target rates, but no he decided to stick to his knitting with the QE bond-buying programme. Many might have expected the euro to retreat on that news, but it rallied instead. Odd.
But this action was certainly not odd to me. After all, the news does not make the markets and central banks follow the markets; they do not lead them. US rates were already moving up well before Wednesday so forecasting the Fed’s move was a slam dunk.
But in recent weeks EUR/USD has been swinging up and down in a 4 cent range, but I was able to catch these moves for the benefit of VIP Traders Club members. Here is the daily:
My last three trades were as follows: In late January, I sent out a Trade Alert advising members to enter orders to short at 1.08 (the market was trading under 1.07 at the time). This order was filled on 2 February. I based that trade on a Fibonacci retrace of the previous wave.
As the market declined from there in a very satisfactory fashion, I expected the decline to be sharp as I suspected we were in a third wave down. But when it paused three weeks later (and the decline was looking like an A-B-C), I advised members to cover shorts, take the profits and reverse and go long at the 1.0590 area.
Naturally, most traders would not dare to attempt such a reversal of position. After all, we had good running profits from the shorts taken at 1.08 so why abandon a good trade? Isn’t there an iron-clad rule you should let profits run? The answer is sometimes you do and sometimes you don’t.
There are few rules that are absolute.
The reason I changed my stance from bear to bull is that I no longer had confidence in my original wave analysis and odds were growing that the downtrend could reverse and go up and test the 1.08 level again.
I have a confession – I had absolutely no idea what the best wave labels were. They were totally confusing. What aided my analysis was my years experience trading this market – and a further decline below the 1.05 area just didn’t feel right.
In fact the market did indeed reverse back up from 1.05 and yesterday, I advised members to take at least part profit at the 1.0770 level on the rally.
So that little exercise has produced a banked profit of 350 – 400 points and we are still holding a winning long position.
But what now? On my chart I have a blue line. That is a solid line of support/resistance with several accurate touch points. Let me re-draw the chart
Hang on – could this be a Head & Shoulders reversal pattern I see before me? (see my text pp 26 – 32). It has all the right attributes with a mom div at the Head and if so, the blue line becomes my Neckline. Hmm.
As I noted before, dollar bullishness/euro bearishness is extreme. Only a small push above the neckline would light the cotton fuse and explode the protective buy stops put there by the bears. I am sure even the euro bears can read a chart and see that the 1.08 area is a zone of strong resistance and a push above it would be dangerous for their short positions.
As always, I will let the market decide what it wants to do next week. We have our banked profits and our remaining long position is protected by setting our Protective Stops at Break Even for a no-loss trade, at worst. And maybe the best will happen anyway!
Will the Aussie follow suit?
The Aussie has also been trading in a range in recent months and we have been lightly trading it. Our most recent venture was to short it near the recent high and take a profit last week on an A-B-C decline to a Fib support level.
But here on the weekly, you can see that like the euro, there is a major line of resistance just ahead:
And I am just as sure that if it can poke and close above the current 77 – 78 zone, there will be masses of buy stops just above the blue line that will set off a short covering rally.
But if it does, the pattern suggests a five-wave continuation (see my text pp 38 – 39, 144 – 145). Can you see it?
Wouldn’t the above scenarios in the euro and the Aussie set the cat among the currency pigeons? And the media pundits will be at a total loss to explain the falling dollar as they still cling to their old story of a ‘rampant’ dollar.
A lesson in tramlines
Staying with the currency theme, here is a great lesson in how you can use my tramline method to pinpoint direction of travel and setting targets for profit taking. Here is the daily EUR/GBP
The standout day is 7 October when the pound underwent its ‘Flash Crash’ to make a low of 1.18. The media said it was caused by a ‘fat finger’ in Asia, algo traders and Hollande’s comments about a hard Brexit. Ha!
After that huge swift spike, I reckoned this market was just too dangerous to play and I left it alone. But look at how the tramlines are in play. The two lower tramlines I drew on 9 January and then I could draw in T3. That gave me an upper target (arrow on T3). This was a line of resistance and the market retreated in a nice A-B-C (with mom div) to kiss the tramline on the A wave.
When the market then rallied above T3 after completing wave C, I could draw in T4 which gave me another target at the 88 area (arrow on T4). Because T4 is a line of resistance, the market is backing off it.
Isn’t that pretty? I do not often see such clear-cut tramline effects, but this is a beauty.
VIP TRADERS CLUB NEWS
Members have taken huge profits from shorting the 30-yr US Treasury Bond since it made its all-time high in July of last year at the 177 level to drop to its December low at 147 (a massive decline of 30 big points). In fact, I am gratified to relate that I managed to get members short just a handful of ticks from that all-time high, which I identified beforehand from my wave analysis.
Now I am preparing members for a large counter-trend rally sometime this year and expect to take huge profits. If you wish to join us, get details here.