End of 2018 and time to take stock (Short HaHa!). I have been waiting for a big stocks Short opportunity for several years and finally it looks like it is arriving. It could be the biggest Shorting opportunity any of us have ever seen. Some have pointed to Bitcoin but that was not a credible opportunity in my opinion, unless you are a pure gambler. Patience is certainly a virtue with this trading game if you are seeking to catch a big move and it has been on FX too. Having missed the first bearish wave down from April 2018, I have been watching for the probable retrace to get Short for the big wave 3 down. I am also interested in swing trading the retrace and have been attempting to do this for the last few months of this year but each time a possible rally presented itself it broke down to set another lower low. It is very hard to catch a wave 1 termination but another possible turning point is currently presenting itself. Will this be the one? And what might happen next?
I regularly relook at my entire assessment to see if anything has changed materially and now seems like a good time to relook at FX. The monthly chart shows the long term perspective and the potential for a long Bearish move, once the retrace rally is out of the way. The Euro had been on a charge vs USD since its inception in 2002 (well the paper currency launch) but peaked in 2008 during the Credit Crunch and since then, as with most currencies, has been steadily losing value against USD. This also comes during a period of increasing turmoil in the EU (in particular for the Euro zone), which has been well covered in other threads but in short the Euro zone has some insurmountable (in my opinion) structural problems including a disparity between the various country economies (the likes of Greece and Portugal urgently need to devalue and Italy and Spain have major issues), inability to operate a true central bank and a wide range of individual country credit rating (resulting in a lack of uniform debt cost). Add to that political turmoil that is unlikely to be resolved any time soon (not least the migrant issue) and the Euro could not only fall heavily but could actually unravel just as the previous iteration, the ERM, did. So from both a fundamentals and technical perspective I see the Bearish trend continuing in 2019. I fully expect the inception levels of sub $0.90 to be reached and quite possibly the theoretical all time lows of $0.63, if not oblivion.
But what about that pesky retrace? Not much point in placing a short now unless you are willing to take a huge stop loss exposure, which I'm not. Looking at the Weekly chart you will notice a nice head & shoulders formation in 2017 that broke out through the neckline with a large gap, that crucially remains unclosed. I expect this to be closed in due course. The whole of the 2017 rally is enclosed by a consolidation Triangle formation, a likely Pennant/Flag that was broken to the downside in April. The move down since then is also enclosed in a Triangle that is now on the verge of a breakout into a rally. I also have a credible EWT 1-5 form for the wave 1 (blue) down and I expect the rally to be an A-B-C retrace, which would confirm the overall trend is still Bearish. I also have Positive Momentum Divergence (PMD) at the Nov wave 1 (blue) turn, which can also be seen clearly on the Daily chart. The wave 1 (blue) also turned on a strong weekly chart pin bar, which was coincidental with the Fib 50% off the 2008 high (see Monthly chart).
Looking at the Daily chart then I can see that PMD at wave 1 (blue), which is looking strong. The move down to the turn is enclosed in a possible ending triangle that was broken and retested (support held) and then that support zone was tested again and again held and then put in a sharp rally followed by another retrace down, which put in a higher low. This kind of price action is typical of a consolidation phase prior to a strong wave 3 rally and now the market is poised over New Year at the crucial Weekly Chart Triangle upper line. A breakout through this line (which is a must to confirm the retrace) that is fast and long (signature of a wave 3), maybe even with a gap through the resistance, would tee up a run to a wave A of an A-B-C that could ultimately terminate with a retest of the breakout zone of the Pennant (circa 12,300) and the Fib 76/78% but we will have to see how the move progresses to assess the likely turning point back into the Bear. While the retrace may be lucrative it is always risky trading counter trend, especially if you do not deploy swing trading techniques, as trend trading often does not work, unless you get an early A-B and a long C trend. The bigger opportunity is clearly tracking this potential road map to spot the next Bearish phase. However as a swing trader I am more than happy to trade this and related FX pairs and am already Long from previous lows. My trading strategy is to hold those further down Longs for the termination of the A-B-C move and to add on key breakouts for a shorter term trade to the Wave A turn. I will not trade the Wave B but wait to see if I can spot the turn back into the final wave C move and pyramid this to the end of the whole retrace before reversing into the Bear move.