In the physical world, nothing happens without a cause. It’s an “if, then” kind of place we live in: If A pushes B – then B falls over.
It’s only natural that investors and traders think about the financial markets in the same way. But sometimes, a market rallies or crashes seemingly for no good reason at all. In the stock market, the most vivid recent example of that occurred on September 04, when the DJIA went and lost 345 points. The decline stumped almost everyone, because there was nothing – nothing – in the news that day that could have reasonably explained it.
In currencies, I would call the EURUSD’s rally that started on September 11 a good example of the same “mystery move.” Consider the facts.
Prior to the rally, in less than two months, the dollar staged a stunningly strong comeback against the euro, pushing the EURUSD from above $1.60 down to $1.3882. Most forex analysts attributed the dollar’s strength to its status as a “safe haven” in the current global economic conditions.
Fine – but on September 11, after touching that one-year low of $1.3882, the euro-dollar exchange rate suddenly started moving in the euro’s favor. By the close on September 12, the dollar gave back over 3 full cents – or 300 pips, in forex lingo – pushing the EURUSD back up above $1.42.
Some forex analysts quickly said the dollar was losing “on reduced demand for the U.S. currency as a haven.” (Bloomberg) So, on September 10, the USD was a still “safe haven,” but the next day it suddenly lost that status? That’s not impossible, but surely there was some dramatic event that day that shook the global investment community’s faith in the buck?
There wasn’t. Just like in the DJIA’s 345-point drop on September 04, there was no good fundamental reason in the news on September 11 that could have reasonably explained the dollar’s reversal.
Market action like that is made possible by the fact that the financial markets are not moved by reason alone. To a very large degree, they are also moved by fear and greed – two very strong emotions. If you look at it that way – the way Elliotticians do – things begin to make sense.
As an Elliottician, you don’t go looking for explanations outside the market – you look within, at the market’s internal structure. Each wiggle (or wave) on the chart represents market emotions (fear and greed) wrestling before your eyes. And they do it in recognizable Elliott wave patterns, which is what makes market forecasting possible.
For example, on the morning of September 11, as the EURUSD rebound was starting, Elliott Wave International’s Currency Specialty Service posted this intraday update and chart at 10:14 AM Eastern (New York) time:
10:40 ET/14:40 GMT
[EURUSD] Last Price: 1.3914
[At or nearing a turn higher] The market is hovering and I'm looking for evidence of a turn. …the decline is extended, on both a daily and intraday basis. The ability to count five waves down from near 1.4550 suggests the stage is set for a rally attempt. What's lacking is an impulsive rise off the low. An argument could be made that the recovery from 1.3894 is a three. It may be best to wait for a rally above 1.3976 before turning bullish.
What turned our Currency Specialty Service analysts bullish the EURUSD on September 11 was not the dollar’s “safe haven” status. It was simply that the decline was showing a completed Elliott wave structure, and a reversal was due.
NOTE: Mark your calendars! On Wednesday, September 17, at 4 PM Eastern (New York) time, EWI's Senior Currency Strategist Jim Martens is hosting a free, live 40-minute webinar titled "Anatomy of the Trade." Jim will focus on how you can turn the Currency Specialty Service forecasts into actionable forex trading strategies. The webinar is for Currency Specialty Service subscribers only. Subscribe now and receive registration details on Monday, September 15.