A little after 5 AM Eastern (New York) time on Tuesday, July 15, the euro hit a new all-time high against the U.S. dollar: just under $1.6040.
Markets move for a reason, goes the conventional wisdom, and it's doubly true when it comes to major moves like that. Interestingly, though, the EURUSD rallied to the new high after the news of an economic report showing that "investor sentiment in Europe's largest economy, Germany, is at a record low." (Marketwatch.com)
How could that clearly bearish report have been interpreted as bullish news? Apparently, it was – because, paradoxically, "confidence is so low in the U.S. economy… that all indications that the European economy is sputtering don't seem to matter."
Let's accept this argument, for a moment. I only have one question: Next time a key European economic report brings bad news – are you going to be buying euros or selling them?
You may say that it all depends on the context of the entire global economic situation. That's true; here's how one's thinking process could go: You hear the news; bounce it against what you know about the key economic indicators in the U.S. and Europe; think back to what the Fed's Bernanke said in their last meeting and what the ECB's Trichet hinted about interest rates in theirs; consider that oil is near record highs, the U.S. consumer confidence is low, and the CPI is rising – and then you make a trading decision.
And you may actually make a correct one – provided, of course, that one of the supposedly bullish economic reports doesn’t turn out to be "bearish" (or vice versa) and ruin your entire chain of reasoning.
For an Elliott wave forex trader, making the same trading decision is much, much simpler. An Elliott wave trader knows that while the market usually spikes on the news, all too often the direction of the spike doesn't depend on what the news actually says. Just like in the case of the EURUSD's latest record high, a news story is simply a catalyst that ignites forex traders' collective emotions. If traders feel bullish, they buy; if they feel bearish, they sell – regardless of the news.
What are the chances the EUR/USD may stage another attempt at a record high? Find out now inside EWI's Currency Specialty Service.
The trick, then, is to know what mood forex traders are in, collectively. And that's exactly what Elliott wave patterns in forex market charts tell you. Take a look at these two forecasts, for example. Both were published by EWI's Currency Specialty Service in the intraday trading hours on the evening of July 14 and the early morning hours of July 15 – hours before the EURUSD staged its record-breaking rally:
Monday, July 14, 17:58 ET/21:58 GMT
[EURUSD] Last Price: 1.5905
[Higher] Focusing on the same segment of the rally phase as yesterday, it appears that either the anticipated fourth wave bottomed a big deeper than suggested, or that it is still developing possibly into a triangle. As long as prices are well contained by the up-channel, the outlook remains bullish.
Tuesday, July 15 02:20 ET/06:20 GMT
[EURUSD] Last Price: 1.5931
[Consolidation then up] …the price action appears well supported, and although 1.5906 and possibly 1.5871 could be tested, the short-term upward trend should resume and see a challenge of the 1.6020 top in due course.
Elliott wave analysis often allows you to predict market moves with an amazing accuracy, sometimes down to a few pips. And while it never guarantees a correct forecast (what does?), you'll probably agree that having it as part of your trading arsenal simplifies and sharpens your decision-making process.
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