Monday, July 23, 2012

Minor 2 Topped; Euro Bears be Careful

Learn Elliott Wave Principle

Last week I said I hoped to get a daily reversal pattern to feel confident in getting short on the expectation of Minor wave 2 topping.  I wasn't fortunate enough to get pattern.  But the follow-through weakness to the downside today suggests Minor wave 2 has already topped.  It will be confirmed, in my view, on a break below the first (b) wave low.  But I will try to get short every chance I get regardless.  My stop is just above 1380.39 since that is the level that needs to be held for the above labeled wave count to remain intact.

Bottom line: I'm shoring rallies, and any good opportunity that arises, with a stop just above 1380.39.

(VIDEO) EUR/USD: A Great Real-Life Lesson in Elliott Wave Analysis

As many of you know, I'm not confident in the longer term wave count for the EUR/USD so I've been using basic technical analysis to identify the larger trend, and also using short term wave counts, and have just jumped on board for the ride.  Although my analysis on the euro has been quite simple, it has been extremely effective for over a year now.

Although I don't know the larger wave count, I can see that it looked like the weak, choppy sideways rally from the 1.2160 area to the 1.2320 area is indicative of a 4th wave.  Judging by the size and length, I'm estimating it's at Minor degree.  The resultant decline into this morning's low is clearly impulsive as you can see I labeled it a 5 wave Minute degree decline. 

If the above count is correct, then the bears need to beware here.  We have a 5 wave decline into a 5th wave of Minor degree preceded by a gap open that has not yet been filled.  So a large snap back rally could occur at any time.  This is no guarantee of course, so I don't want to get long.  But I have covered 75% of my short positions to reduce risk.  I've made a lot of profits on this euro run and I'm not giving them back simply because I didn't exit when the risk/reward flipped against me.  Sure, the euro can continue cascading lower and I'll miss more profits.  But this is a risk/reward game, not a roulette gambling wheel.  The risk/reward in my view is not worth staying heavily short here.  I have a tiny short position still in place and will exit all of it once I see a strong sign of a reversal.  It's also possible I'll get short again in the near future if the outlook changes.  But right here, at this juncture, the evidence is strong that the euro's downtrend may be in jeopardy for the moment.

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S.S. said...

How do you reconcile a large downtrend on the S&P (3rd wave) and the upcoming upward correction on the Euro once its 5th wave bottoms? I am giving 50% chances to a triple zigzag on the S&P.  

PrincipleAnalysis_Blogspot_Com said...

Good catch - I don't like it when the euro and S&P setup to move opposite each other because oftentimes it means one of them is wrong.  But there is no requirement for either of these markets to remain correlated so I can't really trade based on it, on just keep it in the back of my head.  The outlook that the euro is bottoming is more of a guess on my part.  The larger trend is still down since no solid evidence suggests it has bottomed.  I just have a lot of profits on shorting the euro and don't like the setup right now so I'm ducking and taking cover on the euro for the moment.  Stocks on the other hand do show solid evidence of a major top.  So I'm comfortable simply reducing risk on the euro and getting short the S&P.  Just playing the probabilities to my favor.

What makes you think a triple zig-zag will occur in the S&P?

S.S. said...

Beside the potential correction in the euro, the relatively shallow retrace in the crude oil make me keep a triple zigzag as an option for now. The oil has retraced 38.2% which satisfies the requirements, but is not as ideal as a 50-61.8% retrace would be. The time will tell.

Michael said...

Oh man, the moment we have been waiting for and I don't have any money to trade with yet, have to wait until the end of Aug before I can jump on this ship to profit, if it really coming.  Hopefully I can catch the 3rd wave down or a c.  =/

PrincipleAnalysis_Blogspot_Com said...

It's all good man.  If the wave count is correct, a major down phase will occur for many many months.  You'll have plenty of good entry points later.