by Nico Isaac
Updated: May 19, 2017
Imagine you're a contestant on a game show called "The Price Trend is Right."
Over the mic you hear your name: "So and So, come oooooonnn down." Here's the challenge: You know a market's price trend is right for the taking. But you can only choose the analysis behind one of two doors as your guide for anticipating the trend's direction.
Door Number 1: Fundamental analysis
Here, the premise for predicting future price action is via the past. Take the euro/yen exchange rate in early April of this year. At the time, the euro had just endured its longest losing streak against its Japanese counterpart since, well, ever! In fact, in over a month, the euro had only risen two times.
The experts saw no change in the bearish news events keeping the euro down. And so, they saw no reason for its downtrend to change, either. Wrote one April 11 news source:
"The anxiety ahead of the French presidential election, the US missile strike in Syria, and heightened tensions on the Korean peninsula all seem to favor the yen.
The French election and the widening premium that is being demanded of the French are seen as broadly euro-negative." (Business Insider)
The answer seems obvious. Pick "Down" for the trend in the euro... right?
Well, there is another door, remember!
Door Number 2: Elliott wave analysis
Here, the premise for predicting future price action is via Elliott wave patterns. These are fixed, finite, and self-similar across all time frames. One such example is the Elliott third wave, the strongest of all impulse patterns. (Impulse waves are labeled 1-5 and move in the direction of the larger trend.)
Let's go back to the euro/yen from early April. Then, in the April 16 Currency Pro Service, analyst Tony Carrion showed a bullish third wave set-up in his daily cross rates coverage of the EURJPY. There, he made his bullish outlook clear with the following chart and analysis:
"EURJPY has exceeded downside projections in an extended fifth wave decline. It should, however, be within making its low if it hasn't done so already at 114.84. An impulsive rally above 115.52 would be a good initial sign for a bottom."
So, to recap: Door 1 is bearish the euro/yen, based on past fundamental weakness. While Door 2 is bullish, based on an expected third-wave rally.
Well, the next chart shows you what happened: The euro/yen hit bottom and soared in a powerful rally to multi-year highs!
The right choice was Door 2, Elliott wave analysis. And it continues to be the right choice for anticipating near- and long-term trend changes in the world's leading currency markets.