EURUSD Retrace rally then big drop

[Mercury]

@Foxy

My Longs are much further down and stop protected at BE.  I never move stops.  Easier to reenter than take a beating.  Typically if I get stopped out it is because the set up failed but occasionally, like currently on GBPUSD, a retest of the breakout zone occurs which could still rally to follow the set up.  Again, just need to be ready to reenter on that rally if it happens.

Not really expecting an over night move on this one, although I know where you are coming from with the overnight thing.  I think it may take a a little more time to resolve.  GBP and AUD are at pivotal points so worth watching.  EUR has some way to go to look worryingly like a Bear in the short term.

[Mercury]

A drop to the next level, the Fib 62% and strong rally off this level.  My GBP Longs were stopped out so I begin again there but my EUR Longs were not and I have added on the bounce today.  A fresh higher high tomorrow and this one is set to run and run.

[Mercury]

USD continues to thwart me, best laid plans and all that, but swing trading is all about dipping in and out until you catch the move for me.  The secret is not to lose big on this stuff.  EURUSD is at yet another critical point, the Fib 76/78% (short term move).  This is coincidental with a previous price gap, a point where not all orders were filled so they may be this time...  We have had a small bounce rally here this morning.  A break about near term resistance (11190ish could be interesting especially if it happens fast and strong. 

[Mercury]

The mirror image of the USD DX is the EURUSD, the pest pair proxy for pure USD.  On the Monthly Chart I have a similar potential Flag formation in play as for DX, which has provide support today, along with key resistance level zone.  The market put in a slight lower low to turn with a pin bar spike to the flag line and create a double bottom.  The is PMD between these 2 bottoms, a bullish sign.  As with the DX I might expect a short term EWT1-2 retrace prior to a stronger rally.  I am looking for a breakout of the upper Triangle line t confirm the bullish retrace is on and looking as Fib 62% in the first instance as a target, with a chance that the long term resistance trend line might be tested, however by then I will be looking for the turn back into a long term Bear market.

[Guest nash3]

Just wondering but why do you think we will see such a large pullback?

[Mercury]

@nash3

If you look further back into the thread you will see the build up over time but to summarise:

1. I don't know, of course, how far any retrace would go, if indeed it even happens.  There is a perfectly reasonable scenario supporting a breakout of upper resistance into a long term rally, indeed I am biased to exactly this long term USD rally for a variety of reasons but chiefly it is a scenario of flight to safety while simultaneously the Eurozone meltdown (that Draghi has been desperately trying to stave off) materialises.  See my Monthly Chart below for long term perspective (note the saying, "the flag flies at half mast"), hence a projection to the 5000 level but there is a long way to go before I get truly interested in that target.
2. Elliot Wave Theory holds that markets move in wave patterns [1-5 or A-B-C].  If you believe, as I do, in the USD long term rally (see my thread on DX - "what is the USD doing?") then we are, perhaps, due a retrace, although as I said the market could breakout out through resistance from here so this is only 1 scenario.
3. Assuming that the retrace scenario is correct then, after we see a confirmed break to the downside on USD (rally on EURUSD), the questions becomes not if but how far will it carry.  I use a number of analytical techniques and indicators to determine the end of waves and the retrace waves are easier to spot as you are looking for a turn in a key resistance zone.
4. So what are these zones for EURUSD, on my Weekly chart below you can see some of them as follows:
   • The first target, once there is a breakout, is the Fib 38% (circa 11650).  For me this is a minimum expectation but price action will reveal all as it progresses so this is just a projection not a prediction [some people get hot under the collar about what I post, for reasons passing understanding, so I find myself having to repeat that I don't make predictions].
   • However just above the Fib 38% is a large long term resistance zone that stretches beyond the Fib 50%.  The top of this range (crica 11850) represents the second target.
   • Then there is the Fib 62% at 12,000 (nice round number), my personal favourite.
   • Had the market turned earlier, when I was previously tracking it, I favoured the Fib 76/78%, which coincided with the upper monthly chart resistance channel line and the breakout of the previous rising and narrowing channel.  Although depending on how long the retrace takes and how fast the final wave runs we could see a hit on the upper trend line yet.

My plan is simple, though never easy to execute as with all things trading:

1. Identify the wave 1 turn, have had a few attempts at this so far, and get in early
2. Pyramid on a breakout of key resistance
3. Move stops to break even so I get into a no loss position
4. Manage the trades through my expected road map to the pre identified potential rally end zones and then,
5. Exit for profit and use this to fuel a long term Short campaign.

I also watch the GBPUSD and EURGBP pairs in a Triad to assess relative movements.  Overall On this I expect GBP to rally harder than EUR, which, if correct, would suggest one of the earlier targets on EURUSD.  As ever it is all about watching the price action unfold.

[Mercury]

So much for the targets, what about the chances of the retrace rally actually sticking?  My technical case for a turn is as follows:

• The channel, which may now be classified as an ending diagonal, has been broken through and with some force.
• Prior to that there was a spike drop to the lower channel line and rally away in a pin bar, which is visible on the Daily chart (this is crucial as candle indicators are more reliable on the bigger picture chart).
• This spike and rally also brought price back inside the lower monthly/weekly flag lower line, which if it holds to the end of next week will be telling.
• And there is Positive Momentum Divergence at the spike turn
• Need to see a breakout from the Weekly upper Triangle line to be confident of a rally.

Short term we haven't yet seen a small scale EWT1-2 bearish retrace that would set up a stronger rally phase so I am looking for that to add to my turn position.  The most likely  retrace level would be around where the previous channel was broken, depending on where the current rally actually tops out, if it hasn't already.

[Guest nash 3]

Yes when I saw the pin bar I thought it might be over. I still think it wont be a huge pullback more of a cool off into sep/oct but time will tell. Hence I don't want to play long eur/usd, keep the powder dry for the main event. Ofcourse if euro elections don't go well then screw the pullback/cool off.

We seem to be fairly in agreement about the dollar rally. Do you read Martin Armstrong's blog?

If not quick summary of his thoughts-

Dollar rally flight to quality blah blah. 1st EM Turkey etc then Europe and Britain, then Japan and finally US gets into trouble with dollar possible being at all time highs.

Gold suffers initially maybe breaking through 1000(950 or 850) but starts to rally from 1st quarter next year. Target 5000 by 2024. 

Stocks specifically US stocks make all time highs(again flight to quality) though possible pullback this year perhaps a bear trap.

[Mercury]

EURUSD is currently following my short term road map as part of my longer term assessment in favour of a significant retrace rally, driven chiefly by USD weakness.  Shouldn't have to wait to long for this to resolved one way or the other.

[Mercury]

EURUSD currently testing the Fib 62% support zone with a good EWT 1-2 retrace pattern and PMD.

[Guest nash3]

hey mercury not sure if you noticed my reply. It was delayed as I posted as a guest. Just scroll back a touch to see it. 

Anyway oh dear I took large profits and we are going back down it seems haha. Thank god I still own the puts 😉

Close below 11,100 and we are back on

[phillo]

I can see why @ 1.1111 might offer some support , but this is some down trending channel at the moment

[Guest nash3]

hey elle, whats ur thoughts on eur/usd? Are u a long term bull or bear? Im guessing short term bear

 

[phillo]

trend is down, right ?

[phillo]

picture was used for something else, so ignore the text in it !

[Guest nash3]

haha ok

[Mercury]

The trend is indeed your friend,

"Until the bend in the end"

Amazing how many trends end short of the lower (or upper lines) when they turn.  If you wait for a final touch oyu are sure to be left behind.  The safe bet is to wait for the upper line breakout.  Following a trend does not help with finding the turn, you need other techniques.  Following a trend is only really useful when you know (yes know) the trend as turned for the long term.  USD may have but I am not yet convinced and until I am I will seek the retrace turn.  If it drops through key support, on all major pairs then I will swing the other way but we are not there yet.

Current price has stalled and not yet broken key support.  GBPUSD and other pairs are further from key support and also at key turning points.  Next few days will tell the tale I feel.

When you consider where the lower low is on EURUSD, it is not that big a bet in terms of exposure...

[Mercury]

EURUSD dropped to the Fib 88% retrace level and a potential channel breakout failed retest and has since rallied quite hard up through short term resistance.  Strong PMD at both the wave 1 (blue) turn (on a spike pin bar) and the recent possible retrace turn.

[Mercury]

Nice break and failed retest of the short term resistance zone (not forms support).  Still some way to go to clear near term resistance that could act to send this pair back down yet again but once again the indicators are aligned to a rally.  How far and how long, time will tell.

[Mercury]

Looks like EURUSD has just poked its head above the previous high (Brown 1).  A break through the associated resistance zone should bring up a test of the Weekly Triangle resistance line and related overhead resistance zone.  A break of that should offer a significant rally.

[Mercury]

The view from the Daily chart...

[Mercury]

Referencing the posts above at the end of May, "the trend is your friend, until the bend in the end".  Swing traders (and longer term traders - I am both) seek to identify the wave changes both at the end of major trends and intra trend retraces.  In this thread I have been showcasing just such an attempt (being an intra trend swing).  It often takes many goes to catch it and requires a methodology that minimises both initial exposure and recognises a reversal fast to keep the cost of these attempts low (even to make some profits).  The key is to lose small but ensure you catch the big move and both stay in and pyramid the hell out of it.

I had a number of signals that suggested a turn may be once again on and posted on this at the end of May and the beginning of the week just gone.  I managed to get Long around 30/31 May and go again last Monday and Thursday (see my hourly chart for specific trade points).  My Longs are now all stop protected at break even.

The thing I was really waiting for was a confirmed breakout of the Weekly Triangle.  This is a trigger for me that the retrace rally I have been tracking for many months now is on.  There have been a few fakeouts along the way but this one feels like the real thing (famous last words?).  On the Weekly chart you can see a clear break and close above the trend line.  The wave 1 (blue) turn occurred on strong PMD and 2 weekly chart pin bar retest failures (3 in total).  This was all strongly Bullish to me and my 1 hour chart showed a deep 1-2 retrace to Brown 2 at the Fib 88% and turn with PMD and a rounded bottom form followed by a short term ice line breakout (this is where I took my Longs).

On the Daily chart the weekly trend line breakout was followed by a hard retest fail with a long spike through the line and return back to close above.  This will have cleared out those with stops too close (training or otherwise) and the resulting pin bar is a very strong bullish signal, coming as it does on that failed retest with a strong rally away.  That was Thursday and then Friday added to the Bullish sentiment with another strong bullish candle.

Overall I see this as a confirmed breakout and while I cannot rule out another turn and test of the weekly trend line the odds are favourable for a sustained rally (or bearish move on USD to be precise).  A retrace tends to move in an A-B-C wave form so I am expecting to see this leading to a wave 2 termination, probably around 12,000 but lets see how price action progresses on that.  After this I expect that big drop I reference in the title will be on.  It is important to watch the price action on this as a wave B drop could take out lots of training stops, or worse cause losses for those too bullish.  Trading a retrace requires a different approach to trend following, it is pure swing trading territory.  The long term trend remains Bearish for me and while I am swing trading this retrace I am really focused on getting Short at the appropriate juncture to ride a long term wave down to the conclusion (again see prior posts on this thread for my views on where this could end up.

 

[Mercury]

Short term trend change in USD and related FX pairs this afternoon.  Looks to me like a retrace bearish move at present.  On EURUSD I have a wave 1 channel breakout to the downside to begin the wave 2 retrace.  It is likely that the lower low this afternoon represents the conclusion of A-B part of the retrace, which would therefore drop reasonably fast in a wave C to conclusion.  I have several candidates for that conclusion, targeting the correct one will require looking across several pairs and DX for congruence as well as primary signals like PMD and a strong wave C EWT count.  Price action will tell the tale, should take the rest of the week to resolve.

I cashed my channel breakout Long as this is likely to be taken out on the retrace but my other Longs are firmly below the Weekly channel line and therefore safe unless the market reverses into a long term Bear.

 

[dmedin]

Can you also approach that by starting a five wave count from the purple 1 near 11,200 or does it need to be nested within other waves?

[Mercury]

Do you mean blue 1 near 11,120?  If so then yes you could assume the brown 1-2 is part of the while move up.  I don't like the price action on that through, the move from brown 2 to pale blue 1 seems more like 1 wave to me and the nested scenario fits better.  Given that brown 2 retraced very far it doesn't change the current retrace targets so I am ambivalent about it.

[Mercury]

EURUSD has travelled all the way down to my final turning point and put in a late rejection of the support zone around the confluence of the Fib 62% and the Weekly channel (or Triangle) line that was broken back in early June with a couple of short term failed retests.  I find this to be a fairly common occurrence with the third failure being the charm.  This retrace is also shaping up to be a classic EWT1-2 retrace prior to a strong wave 3 rally.  Clearly a break through this support behind the weekly channel line is a very negative signal and could bring up a retest of prior support at 11,100.  At present I see this as the lesser likelihood scenario.  It could be possible to get a so-called "hard retest" of the channel line whereby the market retests the up sloping weekly trendline forming a head and shoulders.  For now I am looking at the 1 hour chart late Friday price action as a signal of a stop at turn.  I would be looking for a short term rally and retrace in EWT1-2 and rally away to confirm.  If this market rallies then it is likely that most other USD pairs will do likewise.

 

[Mercury]

Price is currently testing the weekly Triangle support line (Purple) (this can drop below mid week but to remain valid it must return above by the end of the week).  There is a lower shorter term trend line (pink) and the weekly channel (or flag) supporting line (Purple) is at the Fib 76/78% support zone.

 

At this point it all looks like a breakout and retest of the Weekly Triangle but that retest could be a hard one in that it may penetrate through and pull back above during the course of the rest of the week.  I am targeting that Fib 76/78% level for the turn with stops below the 11100 level.  A break of this level would reverse the scenario to a Bearish one.  The FOMC outpourings at 7PM UK time will be pivotal this time.  I see similar set ups on a number of pairs and DX.

 

 

 

[Mercury]

Weekly Triangle line is still holding (still need to get to the end of the week above) and with the FOMC behind us and the Fed seemingly set on reentering the currency wars with dovish policy we can be reasonably confident that it will hold.  GBP seems like a hotter buy to me if an A-B is already in and the EURGBP Triad looks favourable to GBP.

[Mercury]

Looks to me like a confirmed breakout of the Weekly Triangle now, gotta wait until the close of play to day to be sure but signs are positive with a failed retest of that line and an alternative 4 hour chart line as well.  EWT labels look good for a wave 1-2 conclusions, which is a perfect scenario for a break and retest as after that comes a strong wave 3 rally away from the failed retest (AKA a scalded cat bounce).  There was PMD at both the wave 1 (Blue) and the wave 2 (Brown) turning points and decent EWT labeling for both the wave 1 and 2 (Brown).  There is a technical possibility of an A-B-C (red) but I have discounted that for now.  A break above the wave 1 (brown) will negate that.

However before we get carried away, the short term is likely to bring up at least 1 further retrace.  I am expecting to see either a drop from here or another small leg up before such a drop.  Maybe a 50-62% retracement and once done this market should rally strongly now that FOMC is out of the way.

 

 

[Mercury]

As with GBPUSD (or even more bullish really)  EURUSD is barely making any kind of retrace at present.  This, together with the retest of the Weekly Triangle line and sharp rally away, is a signature of a wave 3.  I believe this to be a wave 3 of a wave A of a medium term retrace counter trend rally.  This is the rally I have been tracking for many months and now it seems it is finally here.  It will not take as long to complete as the wave 1 did but it will most likely go in an A-B-C form so some reversal is to be expected part way through (impossible to tell where this will happen - my road map on this is indicative only).

A swing trader will hold Longs below the Weekly Triangle line for the full retrace but take a shorter term view on any positions added above the line, basically looking to swing trade the A-B-C to conclusion but hold longer term speculative positions below the line.  This is a vital difference between a swing trader and a trend follower.  For the swing trader this is NOT a trend change, it is a counter trend rally and therefore trend following the rally will not work well.  Things are a bit different on GBP, CAD and AUD though as these markets appear to be already in the wave C of the counter trend so will be trend follow-able until the end of the retrace.  The only thing to watch out for is a flag consolidation point about halfway along the wave Cs, which will most likely occur when EUR is in it's wave B.  Triangulating all of these related markets and the EURGBP Triad really helps to spot the zigzags and make sense of the entire market system, thus maximising gains and exploitation of the move.  Critical also is to identify the end of the retrace to take profits and reverse to position for the much longer Bear market to come after the counter trend rally is done.  I am currently expecting this to be correlated with a final end to the stocks Bull towards the end of the Summer or Autumn.

Regardless of the future the current price action is certainly pointing to a strong rally phase against the USD.  Buy the dips for sure but don't expect any deep dips until the wave A is completed.  Ironically the better markets may be elsewhere on the wave Cs (i.e. GBP is about to become stronger and more consistent than EUR - I wonder why..?).