We've talked recently about how today, the euro weakness/dollar strength we saw in the second half of 2011 doesn't surprise anyone.
But let's dive into some details. What was it about the Elliott wave structure of EURUSD (the euro-dollar exchange rate and world's most actively traded forex pair) that told our analysts to expect EURUSD to fall?
Let's look at a sample of our actual analysis. Here's the EURUSD forecast Currency Specialty Service subscribers saw on November 21, 2011. At that time, EURUSD was trading near $1.3500 -- some 900 pips higher than where it traded a few days ago:
Update For: Tuesday
Posted On: Mon, 21 Nov 2011 19:51:16 GMT
EURUSD
Last Price: 1.3505
[Lower] Whether EURUSD pushes above 1.3615, or not, this pair is headed lower.
Why did this November 21 Currency Specialty Service forecast say EURUSD was headed lower?
You can see two sets of converging trendlines in this daily EURUSD chart. The larger one is labeled C, D, E (circled), and the smaller one says "ABCDE."
Both of these Elliott wave structures are contracting triangles. Those are sideways, overlapping moves that consist of five internal legs (or waves) labeled A, B, C, D and E. The larger contracting triangle is so large that you only see the last three labels, C, D, E (circled). The smaller triangle is fully visible.
Now, what does a triangle mean when you see one on a chart? Here's how the Frost & Prechter classic book on Elliott wave analysis explains it:
Triangles appear to reflect a balance of forces, causing a sideways movement that is usually associated with decreasing volume and volatility. Triangles contain five overlapping waves that subdivide 3-3-3-3-3 and are labeled a-b-c-d-e. ...when a triangle occurs in the fourth wave position, wave five is sometimes swift and travels approximately the distance of the widest part of the triangle. Elliott used the word "thrust" in referring to this swift, short motive wave following a triangle.
That's why the EURUSD chart above is labeled "Completion of a Bearish Triangle." Triangles are sideways moves, which also explains why EURUSD spent the entire last summer making zero net progress (that's that second, smaller set of converging trend lines).
Finally, as the quote above says, triangles are followed by a "thrust" after the "balance of forces" finally topples over.
So there you have it. While the world this past summer was focusing on the U.S. debt downgrade by the S&P and the "European contagion" -- trying to decide which factor would impact the dollar and the euro the strongest -- Elliott wave analysis was sending one clear message: dollar strength, euro weakness ahead.
What about now -- after months of strength is the dollar's bull move finally over? EURUSD rebounded strongly over the past few days...but does it mean the larger trend has turned? Our forex-focused Currency Specialty Service gives you answers now.
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