Euro Dollar and the market
By davidc November 16, 2008
Does the dollar have more to run ?
As we chop around in this 4th wave ( pause in the downtrend ) on the SP the dollar has been pretty much moving inverse with the markets. It is my belief however that we will soon see a resumption of trend in the dollar and I intend to trade it. The fall in the market has increased demand for dollars and its clear the ECB is going to keep cutting and potentially more agressively as we start to consider deflation.
If as expected we take the next leg down in equities this process will gather steam quickly leading to a classic ” thrust ” in wave 5. The eurodollar has thus far been a good proxy for the market too. So what will deflation do for Gold ? Im still studying this and will hopefully post a gold chart tommorrow.
The Euro from a USD account.Im also in Euro land but as most readers are in the US ( from stats ) im posting as if I were trading a dollar account.
The problem of a wave 4 the benefit of wave 5
Definition of Wave 4: Wave four is typically clearly corrective. Prices may meander sideways for an extended period, and wave four typically retraces less than 38.2% of wave three. Volume is well below than that of wave three. This is a good place to buy a pull back if you understand the potential ahead for wave 5. Still, the most distinguishing feature of fourth waves is that they often prove very difficult to count. I have watched great ellioticians stuggle with the SPX / eurodallor count enlessly and this is where the ” non believers ” have a field day ridiculing them. Also as we have a simple correction in wave 2 its no surprise that wave 4 has been testing. The thing about a wave 5 here though is that I think when it does get going it will be a nice ride. If we fakout to the upside longs will be sucked in before hitting a wall of pain and suddenly dumping their positions.
My Strategy:
Given the complexities of wave 4 I expect to have to trade against the herd but manage my risk. I expect the unexpected as we go through this complex move. My plan is to open a core position if we immediatley break the triangle but it will be a who carees position , such that even if we move back to point 4 on the chart i can have my stop a few cents above and add up in that region of the chart. I have not charted in detail the potentials that exist within this triangle or expanded triangle because its tedious but some ( slightly more likely ) possibilities for this 4th wave take us along the blue and green trend lines and its here I would be taking more than a nibble ( long the dollar in my case but short the euro if your based in dollars ). Fingers crossed for the green line which have my long at 1.32xx with a stop at 1.36xx. Its ok to hope when your looking for a high probability entry!
David,
Your detailed explanations with the chart (for example about definition of 4th wave and your own strategy) are very very good. Wish I had the time to emulate! I am happy to point my readers to your blog. Ramki
I am new to your site, and am new to some of your charting methods.
1. The significance of the red, blue and green lines.
2. How is the slope of those lines calculated
3.The numbers on the chart to the left of the plot ?
4. The rationale for your trendlines.
Hope you can explain without having to write a book !
Have no problem with your EW count. I believe the 5th wave will co-incide with the resumption of the bear market on the stock indexes.
Thank you also for outlining your strategy
Hi Josh,
1. The three different lines indicated the three different scenerios open to us at the time of posting.
2. The slope is for illustration only i.e to demonstrate that i felt the breakout upwards would fail before the 1.32 area and move down again.
3. Those numbers arent relevant , i think i accidently pasted them into the image before saving it.
4. Drawing trendlines is partly an art and a science and different traders will draw them different ways. In any case its the one i didnt draw that seemed to have caused the move downwards from 1.31
Personally i believe in the markets we have begun wave 4 of 5 upwards now but still believe the Euro will weaken even as the markets climb. This being said the undercurrents of currency correlation with the market are shifting somewhat. Have a look at Corey Rosenblooms blog afraid to trade and some of the recent forex posts and commentary as a basis for your research, he has some excellent stuff there.
An example of this shift would be major moves up in the indexii of late with only a slowing so far in trend of the dollar and the Yen. In this sense the equity markets may be the leading indicator for forex markets now instead of acting in Unison. This I dont know for sure but one has to respect the fact that something is changing and observe.
Hope that helps.