Elliott Wave Analysis on the Euro
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?
Your count on the daily chart looks great with the strongest momentum seen in wave iii of 3. The first scenario leaves a VERY short wave 5 that has only three subwaves. A new move down in wave 5 from the ongoing or almost finished wave 4 would allow for a divergence with wave 3 to develop and would be my preferred count.
Love the bolg! It’s taken a well deserved spot on my daily must-visit blog list. Unfortunately I am still learning and have my training wheels on for trading, I’ll let you know what I think when I finish the book Elliot Wave Principle. Just wanted to let you know that I appreciate the work you put in here, and good luck trading!
-Ken
On the weekly chart, the 200 period EMA is trading below the 20/50 period EMAs with a bear crossing at $148.
But on the daily chart, the 200 period EMA is trading above the 20/50 period EMAs.
Given that the shorter timeframe leads, it is more likely that wave 4 is actually wave 2.
Andrew,
That was probably the best Elliott tip I picked up – it was from Connie Brown and she described how to begin your Elliott count not at the top or the bottom, but at what seems to be the strongest impulse and that is often the magical ‘third of a third’ wave as you described.
That’s the problem I had with the first count – I initially labeled the 4 and 5 wave but they were just far too close in proximity, given the distance in waves 1, 2, and 3. It feels like we’re in a fourth wave currently, but we’ll soon see which interpretation is correct and what it might mean for broader markets.
Ken,
Thank you for reading! I was quite skeptical of Elliott at first but I had to go into detail for the CMT program and used R. Prechter’s (and A. Frost’s) book and then tried to apply it to various chart examples and then was hooked.
Best of luck! Let me know if I can be of assistance.
Anon,
Absolutely – you could make that argument. Due to the Fractal nature of Elliott, what I didn’t do was show a monthly chart which could have added additional information.
This entire impulse on the weekly chart could be part of a larger wave 1 impulse and the down move could very well be a Wave 2 complex corrective move down.
Regarding multiple timeframes, yes – impulse works its way up, not down, meaning structure on the smaller frame will precede the larger frame.
The ‘death cross’ structure on the daily chart occurred in August at $156, while the corresponding weekly signal came in October at $147.
Hi Corey,
I believe the triangle was wave 4 on the eurodollar. Check out my article linked in my signature.
One other thing I forgot to mention: since wave 2 was a simple zig-zag, wave 4 would be expected to be a complex pattern such as a triangle just starting wave d?
we probably wont see the trend return until Obama starts in the white house next year as this will mark the start of a new presidential cycle on the stock market.
Another way of looking at this is if the Eurodollar busts and closes above the 1.32 mark then wave 5 is complete if we bounce of this area ” again ” then wave 5 is to come. .. thoughts ?
Andrew,
Indeed – I had overlooked that. 2 was a simple wave and – if we’re in 4 which it now looks like we are – then it is a complex corrective wave as expected by the guidelines.
In that case, we would be looking for a Wave 5 to materialize perhaps shortly.
Anon,
True, and there are end-of-year cyclicalities that could come into play as well (usually the US Stock market rallies via the “Christmas” or “Santa Claus” Rally which could also affect currencies & commodities, particularly as the commodities are correlating with the US Equity Market.
David,
We’re clearly at an inflection point, and there are certain things – like breaking through $125 or above $140 – that would officially invalidate one of these views and lend credence to the other. But yes, the $125 level should hold as support but if it doesn’t, then it’s likely new lows are on the way as Wave 5 materializes/continues probably soon after the break.
Hi, Is it posssible we have a reverse triangle going on? I’m inclined to agree with the general concensus of an upward movement, but if this were a reverse or expanding triangle at this point in the upward movement, I think it would serve as quite a surprise to those going long when the triangle concluded with downside movement. Question. Why does the upward movement have to get so high as the 140 range to confirm upside movement. We’re at 134 today. That’s a 600 pip differential from this morning. Bill