EURUSD Retrace rally then big drop

[Mercury]

I am convinced the long awaited (by me at least) counter trend rally is in play now on EURUSD (and GBP and CAD).  However I like to second guess myself to avoid leaning out too far, too early.  Every weekend I pull back out from the short term charts and look again at the long term picture.  I am happy to say that I see no credible technical scenario for anything other that that rally, for a while at least.  However the short term is not yet concluded.  This is not a problem for me as all of my positions are much further down, now I am just waiting for the right moment to pyramid those early positions.

In terms of the Fundamentals, I remain long term Bullish USD but see a strong counter trend rally in play as the Fed wax and wain and wring their hands on what to do.  Each speech brings another wax or wain, I have given up listening.  I believe that when, not if, stocks and bonds finally swing and the economy goes back into recession, likely something worse, the safe havens of Gold (and Silver) and USD will be the primary asset of choice.  Bonds may well be too but they have been very bullish on falling yields (low interest rates) so will likely fall on a yield curve rise before becoming a safe haven.  That said I don't trade bonds so am not knowledgeable on this market.

But all that is a ways off, but maybe not that far off now.  I do believe the counter trend rally on USD pairs will not last anything like as long as it took us to get to wave 1!  And there are several signals and rally end zones to watch out for, that is the beauty of a retrace, the turning zones are clear, whereas on stocks, once you get past ATHs there is no frame of reference.  As a technical trader I prefer the former.

So looking at the charts again I see the following:

• A wave 1 (blue) turn supported by a credible EWT1-5 (albeit a drawn out one)
• A 1-5 count to wave 1 (Brown) that broke out of the Weekly chart Triangle, which encompassed the wave 1 (blue down) plus NMD on 4 and 1 hour charts at the turn
• A retrace wave 2 (brown) that broke out of the wave 1 narrowing channel and ran fast down to retest the weekly chart triangle line and failed to break back into it.  Again the turn was supported by PMD and a credible A-B-C EWT count.
• a 1-5 count wave 1 (light blue) rally (in the case of EURUSD this rally has a classic pennant at the halfway point (see 1 hour chart)
• It is also notable and important that wave 1 (light blue) posted a higher high than wave 1 (Brown).

So all in all this is text book technical performance expected of a breakout rally, whether counter trend or motive trend change.  I believe it is the former not the latter but price action will tell that tale in due course.  For now all I need to know is we are in a rally phase that should carry up to the 11,600 zone initially and thereafter perhaps a second move to the 12,000 area.

However, when I look at the 1 hour chart I am not sure the market is quite ready to break into the next rally phase.  It could be that a very shallow small 1-2 (light blue) is done at he Fib 23% but it could also be that this is a wave A and we have seen a wave B and now turned back into a wave C to complete the 1-2 at Fib 38% (with a chance that it carries all the way to Fib 50%).  So net short term traders need to beware but long term traders with early positions should be fine holding Longs.  A breakout of the near term resistance (circa 11,440) will be a key signal for a sustained rally phase (a wave 3).  I expect this short term consolidation retrace to resolve next week if the market is indeed in a wave 3 as these waves do not hang about, until they get to the flag at halfway that is. 

[Mercury]

Looks like EURUSD is signalling another leg down to the Fib 62%, which could also bring up some PMD, or maybe it has already touched bottom, we are there or thereabouts.  Also seems GBP is leading EUR, which if true should see GBP leap away into a rally first and this would drive a continuation of the EURGBP Bear move.  Either way today should see some resolution.

 

[Mercury]

EURUSD has been held at the Fib 62% support zone, albeit with another small leg down.  There is a possible Triangle containing the retrace that has been broken with a failed retest and rally away, not yet conclusively.  PMD on the 1 hour and a completed 1-5 of a wave C suggest this one may stick.  will need a break past the high from earlier today up past 11320 to be more confident.

[Mercury]

That 4 hour Triangle is bothering me because it was broken too close to the end, conventions charting wisdom suggest a Triangle is less valid the closer price gets to the apex and normally should breakout around 2/3s of the way to the apex.  Now price action has given me an alternative upper line.   Everything else remains unchanged with my analysis on this pair, a breakout of the new upper triangle line could be indicative of a rally but really needs to be with conviction if a real wave 3 and ideally needs to carry above, and close above, that 11,320 near term resistance zone.  I suspect we may have to wait until Friday and US NFP for this.  Today we may see a soporific drift or another leg down...

[Mercury]

4th of July was indeed soporific but US NFP triggered a significant rally in USD that brings up an alternative scenario (as posted in my DX thread yesterday).  Looking at this from the more tradable EURUSD, I see some additional technical set ups from this move that are consistent with an overall A-B in motion that, if correct, should culminate in a strong wave C rally.

Technicals:

• As before, that weekly chart Triangle remains in play with a breakout and 1 failed retest so far.  Another retest is possible, which would conclude the wave B and could occur around the Fib 88% off the wave 1 (blue) - see Daily chart.  Alternatively a turn on the Fib 76/78% zone, coincident with the Flag line, could be the turn point.
• The wave 1 (blue) remains intact unless or until price breaks below the turn and PMD on both Weekly and Daily charts still support this assessment.
• Net negative non commercial COT around the wave 1 turn still holds sway, no new COT data this weekend owing to 4th July holiday, should come in sometime next week.  Could get another round of net negatives on the wave B turn.
• The rally up to wave A (green) was in an A-B-C, which is reflective of a larger time frame complex retrace BUT could also be a straightforward retrace that is already concluded, time will tell on that one.
• The twin supporting trend lines (The monthly chart lower Flag line and the weekly chart upper Triangle line) reflect a particularly important juncture - a hold or break here will be significant I feel.  Note I do anticipate a penetration of the former to touch the latter at fib 88% but we could also get a turn at the Fib 76/78% zone.
• We had a double bottom on the Daily chart before but now a potential Head & Shoulders could be forming with the potential wave B turn being the right shoulder.  A tentative neckline can therefore be drawn, a breakout of which would be a final confirmation of the turn and rally in wave C.

So several scenarios are possible at this point, in order of likelihood for me:

1. Wave B turns before the wave 1 (blue) bottom and runs up fast in a wave C, which could be a straight 1-5 move or a more complex A-B-C form.  The latter is not good for a pyramiding strategy so getting in early (before the neckline is my call) will be important.  Other pairs might offer a cleaner ride that EUR if they are showing a simple form retrace.
2. The previous rally was all the retrace we will get as the market breaks through crucial resistance areas and USD rallies contra to broad opinion.  Would probably take more hawkish Fed to drive this scenario or a collapse of stocks etc (are we there yet?).  Let's see how the COT data goes over the next few weeks, a new net negative will turn broad opinion bullish USD, which could drive the contrarian scenario 1.
3. The least likely is that USD has gone as far as it is going to go in the long run and ultra Fed Dovishness drives EURUSD up and up.  Given the problems in Eurozone I strongly doubt this scenario but technically there is a case so needs to be monitored.

It is worth noting that Stochastic typically touches oversold and bounces away up to mark a significant retrace like a wave B.  This is not a tradable indicator for me but is a corroborating indicator.  Also, until it does touch I would not be calling a bottom.  Also need to watch DX and other key pairs like GBP, CAD and AUD for correlating set ups to help identify either the Wave B turn or a break down.  If USD rally runs up for a while, as it may well do on (see my DX post), then perhaps Gold/Silver will stay Bearish until their respective turning points?  This is not to do with a direct correlation between USD and Gold/Silver but rather a shared driver in Fed policy on the USD and all that this may entail for the wider economy, impact on bonds etc.  There is a lot of macro complexity in the markets at present, it all has to be tracked to attempt to make sense of things from a fundamentals backdrop perspective.  However price action is the key determining factor for trading triggers for me, as it pertains to my road mapped scenarios.  For now I remain temporarily bearish Gold/Silver and am waiting on the sidelines for FX to resolve.

[Mercury]

As with the AUDUSD and in line with my projections since the US NFP, EURUSD looks set to test lower support levels after a short term flag breakout and failed retest.  A lower low here suggests an initial test on the up-sloping Monthly chart flag line and quite possibly a spike through to the Weekly channel line for a retest.  While USD is in rally mode I expect Gold/Silver to maintain their bearish stance.

[Mercury]

EURUSD looks like it could be staging a turn and breakout of a descending channel.  PMD on the potential wave B (green), which has turned in the breakout zone of the Weekly Triangle failed retest (daily chart).  Subsequent breakouts through overhead resistant will be required to confirm as will a small scale 1-5 up followed by a 1-2 retrace, which will take a day or two I would guess.

 

[MYK1]

Mercury much appreciated you hard but please keep it coming and love your reasoning behind decision👍

[Mercury]

Looks like we may be getting that retrace I was referring to earlier.  A possible small A-B (grey) looks to be done as price moves lower.  Obviously need to break below the wave A and then it is all about where the turn will happen (or will it carry on down for a test on that LT supporting trend line.

My lead scenario is for this pair to test the breakout zone (circa Fib 76/78%) but I will watch the form of the price action within the coming small wave C for clues and other related markets.

[Mercury]

I feel a bit like "itsy bitsy spider" with FX and it has been a very long consolidation phase but they all come to and end and the long ones maybe more dramatically.  We could be seeing a turn on EURUSD after a deep retrace.  I will be looking for a small 1-2 and rally again and then need a strongish rally away if this is a wave C for EURUSD.  Interestingly AUDUSD has held up much stronger while GBP turned out to be weaker but if it also turns then it may start to put in a faster rally.  The potential turn is at the previous channel breakout support zone, a key area for me on these retraces (if it is a retrace, the alternate scenario is for a lower wave B - green) and on PMD as well.  The move conforms to an A-B-C retrace with clear 1-5 on the Wave C and the wave 1, just what Dr. EWT ordered.  I remain Long off the breakout zone (and not potentially retrace test fail zone).

 

[Mercury]

Deep retrace on EURUSD, out of nowhere really.  Question now is whether this drop holds at the current turn point or drops through.  USD DX stopped at the Fib 50%, so both at good turn points, and GBPUSD kept on trucking up.

If USD does confirm a turn and drop and US large caps current small consolidation turns back down then board looks set fair for Gold/Silver to rally again.  Interesting times...

[Mercury]

Is that the EURUSD (USD- DX) stop, turn and rally I was alluding to earlier?  Price has hit and may be turning off the Fib 76/78%, which is also a prior channel breakout zone.

[Mercury]

As posted on my "what is the USD doing?" thread, USD - DX and EURUSD (and GBPUSD) are all at key support/resistance zones, potentially waiting for the Fed rate decision, although traders may get positioned early so the next few days trading could see a breakout OR sideways movement until the fateful Fed announcement on Wednesday evening UK time.  For me it is impossible to judge what the Fed will do and equally impossible to assess what traders have priced in or not nor ow the markets will react.  I keep in mind that there is likely to be algo led volatility around the Fed decision and associated press release but otherwise I ignore it and focus on what the technicals are telling me.

I have been tracking a relief rally on EUR. and other, crosses with USD for some time now and am as yet undeterred.  As mentioned a number of key markets are at important levels right now and doubtless the Fed decision will be key to the next leg.

On the Weekly chart you can see that area of resistance but of course there are other resistance levels not far below and a lower trend line that is forming a Triangle channel that could be tested before any rally (or broken through for a more Bearish scenario).  The final turn inside a Triangle (or consolidation patter) does not have to hit the lower line.  If you were to add a Bollinger band indicator you would see that price is currently at the bottom of the channel and potentially poised for a rally therefore (or a breakout to the downside).  Importantly, there is very strong PMD on the Weekly chart (in fact on all time frames) and a 1-5 EWT count down to a potential wave 1 (blue).  Given the market place biases I remain convinced a relief rally is coming.

On the 1H chart I have that potential wave 1 (blue) followed up by a a series of EWT 1-2s, not unlike what I am seeing on stocks actually...  There is a very strong set of channel lines (many touches) and PMD at both the wave 1 (blue) and wave 2 (brown).  There is also a small break and failed retest of the upper channel line, which is indicative if not conclusive.  What we need to see is a rally beyond near term resistance and on up to test the resistance level around 11280-300.  I am Long off the bounce with low exposure stops set.

 

[Mercury]

FX has been quietly getting on with business while Stocks volatility spiked.  Interesting that USD didn't react much to the Fed rate cut but it did drop off from my upper channel (see my "what is the USD doing?" thread).  In mirror of that EURUSD went of a decent rally and broke out of a short term channel in the process.  After tracing a 1-5 up to a potential wave 1 (blue) price is retracing back down and may have put in an A-B and now heading down to complete the retrace.  The most likely candidate for the end of the retrace is the Fib 62% area of the previous channel breakout, although a retest of the actual channel line a Fib 67/&8% cannot be ruled out.  If this plays out then the rally will be strong as a wave 3 and there is some significant resistance over head to get through but once it does this rally should really take off.

 

[Mercury]

EURUSD is taking a little longer than I first thought with the market tracing out a more complex retrace but looks to be settling into a down draft now that should be a wave C to complete the retrace and set up a large rally.

[Mercury]

I would have expected EURUSD to have retraced lower by now but price has remained stuck in a consolidation zone that is tracing a narrowing triangle.  As these types of formation, albeit only short term, are usually a continuation pattern the odds seem on the side of a rally breakout.  Either way the breakout is what I am looking for.  I would not Short the breakout to the downside as I will wait for a potential turn lower for a Long but I would go Long a strong breakout in advance of a test of the weekly chart upper channel line.

[Mercury]

Patience was the name of the game on FX of late, in fact for the past year for me as I sought the retrace rally I have been expecting.  Each time I tried for it the market reversed and either stopped me out for zero or little loss or I took some profits to keep things ticking over.  My latest attempt was at the beginning of August (I posted on this previously), where I took a preemptive Long on a bounce off a lower channel line with decent PMD on the 1H chart, with stops very close so small exposure.  When the market moved away sharply I was able to add on the next small 1- 2 retrace and then I sat back and waited with positions protected at break even.  I expected the market to rally and then come back down to retest support levels.  Initially I was focused on the Fib 62% level at the channel breakout level and price held up there for a short while but I was not satisfied with the wave C EWT count so I thought it might be a small 3-4, which it seems like it was.  Also there was no PMD at the turn so all-in-all insufficient signals for me to even take a flyer.  Given the past price action record on this pair a further retrace to the Fib 76/78% or even lower was likely.  And that is what we got.  Price moved smartly down to that support level  today and then rallied out of the zone hard, where I took some additive Longs on PMD.  If this set up holds then I would expect a small 1-2 retrace back down before a much harder rally.  With GBP and AUD also looking more perky and US large caps apparently rediscovering their pep this could be the beginning of a decent anti USD move. 

[Mercury]

This is what the EURUSD looks like.  At present, although a much weaker rally, which is great for my EURGBP trade, it is still a rally of the Fib 76/78% zone after an A-B-C.  Longer to go than GBP to get resistance breaks and higher highs but, taken together with the DX charts, it does look like a turn into a rally.

turn into a rally.

 

[dmedin]

@Mercury

Where you have marked - 1? - doesn't that candlestick formation indicate a top and a good idea to go short?

Do you put store by candlestick patterns?

[Mercury]

@dmedin, good question, thanks for that.  I do use candle patterns to some extent but only as corroboration.  For example, after a major turn I expect a small scale 1-2 retrace before the meat of the first big move (a wave 3).  I look for the first top and turn and label it wave 1 (the brown label in my previous chart).  The candle patter is bearish as you suggest and there was NMD on the 1H chart.  But I do not swing trade such small moves.  I am a longer term trader not a day trader.  If I was the latter I might seek to go Short there yes but my strategy is to wait for the retrace and go Long, which is what I did.  If I am right, and I have not been for ages on this market, then I will get a long and strong breakout rally that is what I am chasing.  An alternative approach would be to wait for the next breakout above the wave 1 resistance level and/or a breakout from a shorter term channel (see y 1H chart below) and/or a breakout of the weekly channel line.  All depends on your strategy and attitude to risk.

[phillo]

EURUSD  still on course .................

[dmedin]

Missed a nice bearish candle signal.

[dmedin]

Missed another good chance to go short.

[phillo]

On ‎21‎/‎08‎/‎2019 at 21:01, elle said:

EURUSD  still on course .................

 

[dmedin]

Missed it that time 'n' all.

[Mercury]

As with GBPUSD, EURUSD has turned and rallied away from key support with a Pin bad candle and backed up with a strong second daily candle.  I think we may see a retrace move on this pair sooner rather than later though, whereas GBPUSD may continue to rally harder.  This is in line with my thesis for some time connected to the Triad pair EURGBP where I see GBP being stronger.

[Mercury]

EURUSD may have joined GBP in completing a small retrace and turned into a strong wave 3 but I can't rule out another leg down to the Fib 50% on this one and as I expect EURGBP to drop hard this could be a case of GBP rally while EUR lingers or retraces further.  If EUR does rally from here then GBP must rally harder, which is what I have been advocating would happen on a retrace rally against USD with these two pairs so still EURGBP would fall.  Longs here with a close stop below the recent low to guard against the extra leg down would seem to be the way forward.

[dmedin]

I think it's more likely EUR/USD will drop back 10340

[Mercury]

based on?

[Guest Shifu]

Yah. Why is that so?