A reader brought to my attention to look at the Elliott Wave Count for the Euro Index, and there’s an interesting development you might find interesting, or want to share you interpretation of what the count might be, or what might be in store next for the Euro.

First, let’s set the stage with a Weekly Chart:

The complete Elliott Five Wave Impulse began just before 2006 and terminated in July, 2008 for a two-year pattern.

Wave 1 began with positive momentum divergences and carried price above the key 20 and 50 week EMAs as well as officially reversed the trend (series of lows and highs) to up.

The first wave terminated in late 2006 and was followed by a quick “ABC” zig-zag style correction.

Wave 3 proceeded for almost all of 2007 which subdivided into its own fractal.  There’s two ways I see to sub-divide Wave 3.  Notice the way I’ve shown it here violates the “Wave 3 cannot be the shortest wave” principle, so an alternate interpretation would be the following.

Sub-wave iii is actually the top of sub-wave i with wave iv being wave ii.  Now, the move from iv to v could be actual sub-wave iii, in which case the “abc” correction would be sub-wave iv, while the unlabeled wave from c to $157.50 would be the final sub-wave v which would move the circled “3″ to that level, leaving us with a miniature and truncated final 5th wave (that also ended where I have the circled “5″ on the chart).  I would be open to suggestions, but either interpretation has Wave 5 peaking at the same location, thus beginning the corrective phase we are experiencing currently.

Let’s begin at the top of Wave 5 and zoom in for a little more detail… and an open-ended question.

Next, let’s move down to the Daily Chart for an open-ended interpretation:

We see Wave 1 subdivides nicely into a classic Elliott impulse with Wave 2 also subdividing as expected into a three-wave “ABC” pattern which completed at the falling 50 day EMA (signalling a short-sell signal).  Notice also that sub-wave 5 of larger Wave 1 ended on a positive momentum divergence.  Elliott can help add structure to signals you’re seeing otherwise.

Wave 3 was a relatively clean impulse wave down, except sub-wave ii was a little too short for my comfort.  That being said, wave 3 terminated at the October price lows and began what is now open to interpretation.

I see two possibilities:

FIRST, Wave 4 has completed with an ABC pattern into $130 and Wave 5 has also completed, forming a complete small-scale  5-wave fractal move down into the final $125.00 level in late November.  If that’s the case, then Waves 4 and 5 are already complete, with the 5th wave extending ever so slightly beyond that of Wave 3 (almost becoming a truncation).  Notice also that there are multiple positive momentum divergences setting up which hints that this *might* be the case.  Also price is breaking above the key 20 day EMA… but that same structure occurred in Wave 2 which brings us to the second possibility.

SECOND, the entire flat-line move - almost like a rectangle - is actually Wave 4 and the recent move to $130 is actually part of a complex corrective wave.  This view would be invalidated should price continue to move into the territory of the larger scale Wave 1 which terminated at $140.00.  We would abandon this view if that happened.

What are the implications of these scenarios?

If the first scenario is correct, then we’ve completed a full five-wave impulse down which is part of the larger corrective A wave on the Weekly chart, and we could then expect the $125 level to be a bottom, and that the Euro would likely be moving higher in the short-term (and the US Dollar moving lower while commodities might be moving higher).  This view would be proved wrong should price take out the $125.00 level.

If the second scenario is correct (that we are in corrective wave 4 and Wave 5 down is yet to come), then we would expect price to swing back down and take out the $125 level to make new lows into Wave 5, which implies that the Dollar will strengthen and commodities will continue to weaken.

Until proven otherwise, I am inclined to support the first interpretation, but I leave this post open for you to share your thoughts and insights into Elliott Counts, indicator signals you’re seeing, or other structural points you’re analyzing.

What are your thoughts?