Here at Elliott Wave International, each day we get dozens of emails from readers and subscribers. Here's one that came in over the weekend:
"I really enjoy your commentaries on the financial situation, and it all makes perfect sense in regard to the price action of stocks. However, the market I am primarily interested in is Forex, and I am having difficulties relating the strength of economies to the movement of currency pairs.
"For example, since the s@#t hit the fan, the Australian dollar (AUD; a relatively healthy economy) has fallen against the USD (a relatively sick economy). WHY? There are lots of other currency-pair movements that don't make sense to me. Can you shed some light on this subject please? Thanks, P."
An excellent and a perfectly appropriate question. The absolute majority of investing public believes – with help from mainstream financial pundits – that market trends are set by events outside those markets. Politics drives trends in stocks. Supply fears drive commodities. International tensions drive oil prices. And the strength of a currency depends on the strength of that country's economy.
It all sounds perfectly logical; indeed, how can it not be that way? Well, our reply is that assertions aren't evidence. The fact is, market action disproves these presupposed correlations every single day. All you need to do is keep your eyes open.
For example, why isn't gold rallying to the moon? Isn't it supposed to be "the ultimate hedge against inflation and bad economy"? It fell from a high of over $1000 in March to a low of $681 in late October.
Or, why isn't oil selling for $200 or $300 a barrel? Just three months ago, when it was pushing $150, that's what everyone seemed convinced of since "the world was running out of oil." Last week, a barrel of oil touched $54.
Or, why did prices of commodities like wheat and corn fall by half since July – isn't the "world's middle class growing and demanding more resources"?
Or, getting back to the U.S. dollar, why on earth has it gained so much over the past three months while the U.S. economy is teetering on the brink of a full-blown depression?
The answer to all these questions is clear: Conventional assumptions about market drivers don't work – despite what you hear on the six-o'clock news. In fact, if there is one central point in the Elliott wave-based view of the financial markets (and the society at large), it is precisely this: Events outside the markets have NO trend-forming influence.
Sure, news of government policies, international relations, economic reports, wars, etc. can – and often does – cause temporary price spikes. (Often, but not always.) But events cannot change the tide of social mood, which flows from extreme pessimism to extreme optimism and back again for its own, endogenous reasons, carrying the financial markets up and down with it. It's a point of view that completely reverses the conventional concept of causality; a radical and brilliant idea. (This free documentary helps explain it better.)
Speaking again of the U.S. dollar, the Elliott wave triangle formation we talked about on these pages last week is still very much intact. Here's the chart our Currency Specialty Service showed in the EURUSD forecast for Monday (Nov. 17):
The wave pattern in the daily AUDUSD chart is very similar. You can find out what that likely means for the direction of both currency pairs inside the Currency Specialty Service right now. (Hint: It's probably not what the conventional logic would suggest.)
Don't expect the markets to behave rationally. Markets are emotionally driven, and we know of no other method that helps you catch the waves of those emotions like the Elliott Wave Principle. See for yourself.