by Vadim Pokhlebkin
Updated: March 31, 2017
Something in the day's forex news caught my eye today -- something you don't see very often.
"Dollar at two-week high, break of technical barrier prompts euro sales -- Analysts said the euro's fall against the dollar below a technically important level around $1.07 triggered orders by traders to sell. The euro fell..." (Reuters, Mar. 30)
The euro did fall, but "technical barrier" is not the same ol'-same ol' news-based explanation.
Most conventional market analysts reach for explanations rooted in technical analysis only when all else fails. The market moves, you look for a reason based in fundamentals -- but just can't find it. All you can find is a technical support or resistance price level, the break of which probably sent a psychological signal to the market -- and everyone rushed in.
Such events do indeed happen. There is even a term for it: "stop run," or "running the stops." When some (usually bigger) forex players know (or think) that a certain price point has a nearby cluster of stop losses set by other market players, they may try to push the market in that direction. The hope is, if they hit that cluster right, the price will spike past it and create a short-term volatility moment, which nimble players can capitalize on. Muddy waters, clever sharks.
Whether or not that happened when EURUSD fell through 1.07 on March 31, the Elliott wave perspective sees a bigger point. And that is -- all (or certainly most) market moves are technical in nature.
Markets are driven by psychology. News, events and central bank statements -- those are retrospective rationalizations to describe why prices did what they did. Elliott waves, on the other hand, help you to forecast.
Case in point: this week's sell-off in EURUSD. Between March 27 and 31, the pair fell 230 pips. You can probably find news-based "explanations," but Elliott waves predicted the sell-off before it began.
On Monday (Mar. 27), our forex-focused Currency Pro Service posted this "topping" forecast (partial Elliott wave labels shown):
[Posted On:] March 27, 2017 12:59 PM
(Last Price 1.0873): At larger degree [of trend], the rally today has approached the measured objectives for the end of wave (2) of a correction from January. The risk is likely to shift to the downside from not much if any above the high on the day.
This next Currency Pro Service chart shows you the extent of the decline that followed:
[Posted On:] March 31, 2017 09:29 AM
Now that the sell-off has allegedly triggered stop-losses below 1.07, many forex traders may think EURUSD will keep on sliding. However, Elliott waves suggest those expectations are unfounded.
If EURUSD indeed recovers, keep in mind that any "explanations" for that will have come after the fact. To forecast prices, tracking the waves of collective psychology is the best method we know of.