FX COLUMN-Euro to ride an Elliott Wave higher in near term

— Krishna Kumar is an FX markets analyst for Reuters. The
opinions expressed are his own.

By Krishna Kumar

SYDNEY, Nov 2 (BestGrowthStock) – In the midst of what could be
the most eventful week of the year for financial markets,
currencies continue their random walk in recent ranges. Second
guessing short-term gyrations has become a fruitless exercise.

However, a look at euro/dollar using Elliott Wave analysis
shows the pair may be on the cusp of a relatively sharp move
higher, with a somewhat diminishing chance of a final move
lower in the current consolidation phase.

This dip will present a major buying opportunity on the
euro.

Wave analysis by its very nature is open to various
interpretations, and I realize readers may find it a bit
abstract. But to me it is far clearer than the recent raucous
and incoherent ramblings of Federal Reserve officials.

I used the euro because it seems to be leading other major
currencies.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^

For an Elliott Wave analysis of euro/dollar, click:

http://link.reuters.com/zyh43q

^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>

The euro’s decline from $1.5145 to $1.1875 (EUR=: ) occurred
in five waves and by Wave analysis constitutes Primary wave 1.
See the circled 1 in the chart above.

We are now in a Primary wave 2 (circled 2) correction. On
completion Primary wave 3 will follow, ushering in a sustained
drop in the euro next year to as low as $1.11.

Corrective waves occur in what is called an A-B-C pattern.
Waves A ($1.1875-$1.3333) and B ($1.3333-$1.2585) are complete.

Wave C is in force now. Within wave C, there have been
minor waves 1,2, and 3 that have also occurred.

We are in the corrective wave 4. Waves 1,3 and 5 are always
“impulse waves,” meaning they generally move in the direction
of the broader trend — in this case, an uptrend. On the other
hand, waves 2 and 4 move in the opposite direction of the
impulse waves.

THE CASE OF THE CONTRACTING TRIANGLE

The 4th minor wave is taking the form of a contracting
triangle, not an uncommon occurrence.

Triangles, in their simplest form, actually unfold in five
stages. In this case, the following stages have been completed:

a. $1.4160 to $1.3697;

b. $1.3697 to $1.4080;

c. $1.4080 to $1.3734;

d. $1.3734 to $1.4013.

The next stage will be the final leg of the triangle and
should carry the euro down to $1.3750 — the lower limit of
triangle pattern — to complete minor wave 4.

There are more complicated versions of a triangle, and
hopefully we are not confronted with those patterns.

Expect the market’s reaction to the long-awaited Fed
decision on Wednesday to kickstart the 5th minor wave higher,
and to carry us to new highs in the region of $1.4216 to
$1.4582. The former target is a low from Dec. 22 and the latter
is a high from Jan. 13.

Wave 5 will probably end at roughly $1.4375 (give or take
50 pips) which is the 76.4 percent retracement of the move from
$1.5145 to $1.1875. The move up to $1.4375 could take a month
or more to play out.

This should then, in theory at least, complete the euro’s
corrective move higher since June 7, setting up the currency
for a major decline in Primary wave 3.

WIPEOUT

Third waves are normally the strongest wave formations and
never the shortest. Primary wave 3 will be longer than Primary
wave 1, which was worth 3,270 points.

If the euro tops out around $1.44 to $1.4600 as expected,
we are talking about a minimum move lower to the $1.11 to
$1.1300 next year.

As always with Wave analysis, it’s best to be alert for
signals that some other wave counts are in effect.

In the short term, these signals are a break below $1.3695,
which implies a bigger move lower in the euro is in the cards.
Also, a quick break above $1.4160, which means the 5th wave
move up was already under way.

Over the longer term, if the euro moves above $1.4375 to
$1.4582, then there is something radically wrong with the wave
count and we have to consider the possibility of a far deeper
and sustained dollar decline.

A decline in the euro over the next 24 hours hours toward
$1.3750-70 would open up a good short-term buying opportunity
ahead of a 5th wave rise.
(Editing by Kevin Plumberg)

FX COLUMN-Euro to ride an Elliott Wave higher in near term