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Classic EUR/AUD Trade with an Elliott Wave Twist

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Talking Points:

  • Clear EUR/AUD Pullback within Daily Uptrend
  • Elliott Wave Pattern on 4-Hour Chart
  • Possible Entry Signal on Hourly Time Frame

Today’s trade is a bit more complex than usual despite ultimately being an attempt to buy a pullback in an overall uptrend.

As seen below, a rising trend line has just been broken on the daily chart, and price would typically be expected to retest the underside of the broken trend line before either confirming the break or continuing higher. Even if only rising as far as the broken trend line, there would be 277 pips in this trade.

Guest Commentary: Retest of EUR/AUD Rising Trend Line

Classic_EURAUD_Trade_with_an_Elliott_Wave_Twist_body_GuestCommentary_KayeLee_February5A_1.png, Classic EUR/AUD Trade with an Elliott Wave Twist

However, the picture immediately becomes more complex when considering price action on the four-hour chart (see below).

The most notable feature about the pullback on this level of magnification is that it has developed into an impressive downtrend, and in spite of the prevailing uptrend on the daily chart, this might prove problematic. However, some pattern recognition techniques, when applied to this formation, seem to reveal a possible extended third-wave Elliott pattern.

Guest Commentary: Elliott Wave Pattern in EUR/AUD

Classic_EURAUD_Trade_with_an_Elliott_Wave_Twist_body_GuestCommentary_KayeLee_February5A_2.png, Classic EUR/AUD Trade with an Elliott Wave Twist

In this formation, the third wave down (numbered “3”) is in the process of completing, and the analysis suggests that it will make a new low before turning up because there is a smaller five-wave pattern (numbered “i-v”) in progress.

The smaller pattern is what ”extends” the third wave. It is usually considered dangerous to catch third waves, as they can provide surprising momentum, but the daily uptrend in combination with strong previous horizontal support makes a case for trading this effectively.

The support zone has been defined as 1.5029-1.5148. Although this support zone is 119 pips deep, it is worth noting that it has already been pierced, and because traders are expecting a lower low, the risk area is, in fact, only approximately 80 pips in practice. Even a conservative pullback in the downtrend to a declining line of resistance (not shown) would have at least 200 pips in it, and thus, the risk profile is quite favorable, especially if this turns into a runaway trade.

All that remains to be seen is whether price will indeed deliver a lower low on bullish reversal divergence, or marked with a pin bar or bullish engulfing pattern. This should happen on the hourly chart (see below), although two or three attempts may be needed to get in on this trade.

It should also be noted that in order for this set-up to be considered complete, price must make a lower low, regardless of which entry trigger is used.

Guest Commentary: One Possible EUR/AUD Entry Signal

Classic_EURAUD_Trade_with_an_Elliott_Wave_Twist_body_GuestCommentary_KayeLee_February5A_3.png, Classic EUR/AUD Trade with an Elliott Wave Twist

To aid readers, one possible divergence has been visualised on the chart above. Any type of divergence would be acceptable, but this is the most likely set-up if everything goes according to plan.

One final note: Traditional Elliott wave traders may well balk at this set-up, as they normally point out that even if things go well, the extended wave 3 may simply result in a shallow wave 4 to the upside before spiking down to complete a wave 5. To this, there are three points, the first two being theoretical, and the final one being pragmatic:

  1. By the rule of alternation, a shallow pullback on wave 2 (and the pullback was indeed shallow in this case) will often result in a deeper, more complex pullback on wave 4, and this should provide more than enough movement even if the desired target for the trade does not materialize.
  2. There is a formation known as the ”failed fifth” where the fifth wave does not materialize as a lower low, but instead becomes part of the turnaround to the upside.
  3. The wave count may simply be wrong. It is still a pullback within an uptrend, and the best policy is still to engage in order to be well-positioned should a large move develop (especially unexpectedly).

By Kaye Lee, private fund trader and head trader consultant, StraightTalkTrading.com

Analys från DailyFX

EURUSD Weekly Technical Analysis: New Month, More Weakness

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What’s inside:

  • EURUSD broke the ‘neckline’ of a bearish ‘head-and-shoulders’ pattern, April trend-line
  • Resistance in vicinity of 11825/80 likely to keep a lid on further strength
  • Targeting the low to mid-11600s with more selling

Confidence is essential to successful trading, see this new guide – ’Building Confidence in Trading’.

Coming into last week we pointed out the likelihood of finally seeing a resolution of the range EURUSD had been stuck in for the past few weeks, and one of the outcomes we made note of as a possibility was for the triggering of a ’head-and-shoulders’ pattern. Indeed, we saw a break of the ’neckline’ along with a drop below the April trend-line. This led to decent selling before a minor bounce took shape during the latter part of last week.

Looking ahead to next week the euro is set up for further losses as the path of least resistance has turned lower. Looking to a capper on any further strength there is resistance in the 11825-11880 area (old support becomes new resistance). As long as the euro stays below this area a downward bias will remain firmly intact.

Looking lower towards support eyes will be on the August low at 11662 and the 2016 high of 11616, of which the latter just happens to align almost precisely with the measured move target of the ‘head-and-shoulders’ pattern (determined by subtracting the height of the pattern from the neckline).

Bottom line: Shorts look set to have the upperhand as a fresh month gets underway as long as the euro remains capped by resistance. On weakness, we’ll be watching how the euro responds to a drop into support levels.

For a longer-term outlook on EURUSD, check out the just released Q4 Forecast.

EURUSD: Daily

EURUSD Weekly Technical Analysis: New Month, More Weakness

—Written by Paul Robinson, Market Analyst

You can receive Paul’s analysis directly via email bysigning up here.

You can follow Paul on Twitter at@PaulRobinonFX.

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Analys från DailyFX

Euro Bias Mixed Heading into October, Q4’17

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Euro Bias Mixed Heading into October, Q4'17

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

EURUSD: Retail trader data shows 37.3% of traders are net-long with the ratio of traders short to long at 1.68 to 1. In fact, traders have remained net-short since Apr 18 when EURUSD traded near 1.07831; price has moved 9.6% higher since then. The number of traders net-long is 15.4% lower than yesterday and 16.4% higher from last week, while the number of traders net-short is 0.4% higher than yesterday and 10.5% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests EURUSD prices may continue to rise. Positioning is more net-short than yesterday but less net-short from last week. The combination of current sentiment and recent changes gives us a further mixed EURUSD trading bias.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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Analys från DailyFX

British Pound Reversal Potential Persists Heading into New Quarter

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British Pound Reversal Potential Persists Heading into New Quarter

Why and how do we use IG Client Sentiment in trading? See our guide and real-time data.

GBPUSD: Retail trader data shows 38.2% of traders are net-long with the ratio of traders short to long at 1.62 to 1. In fact, traders have remained net-short since Sep 05 when GBPUSD traded near 1.29615; price has moved 3.4% higher since then. The number of traders net-long is 0.1% higher than yesterday and 13.4% higher from last week, while the number of traders net-short is 10.6% lower than yesterday and 18.3% lower from last week.

We typically take a contrarian view to crowd sentiment, and the fact traders are net-short suggests GBPUSD prices may continue to rise. Yet traders are less net-short than yesterday and compared with last week. Recent changes in sentiment warn that the current GBPUSD price trend may soon reverse lower despite the fact traders remain net-short.

— Written by Christopher Vecchio, CFA, Senior Currency Strategist

To contact Christopher Vecchio, e-mail cvecchio@dailyfx.com

Follow him on Twitter at @CVecchioFX

To be added to Christopher’s e-mail distribution list, please fill out this form

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