Early on October 26, the exchange rate between the U.S. dollar and the euro (and the most widely-traded forex pair) began an out-of-the-blue slide from near $1.50. By midday the EUR/USD fell almost 200 points (or pips, if you trade currencies).
On October 27, after a consolidation, the slide resumed and pushed the rate another 80 pips lower.
If the dollar's dramatic show of strength in the midst of all the doomsday scenarios surprised you, you're not alone. Anyone looking at the Monday morning forex headlines was likely caught off guard. After all, the reversal occurred just as China was reported to be making plans for reducing "the proportion of U.S. dollars" in its foreign-exchange reserves -- hardly a dollar-bullish event.
So, Monday morning's "fundamentals" did not fit the price action. What about the market's technical picture? Well, here's where it gets interesting.
EWI subscribers and regular readers of our Free Updates articles know that Elliott wave patterns in the U.S. dollar have been strongly suggesting strength ahead. On the evening before the buck took the upper hand, our intensive Currency Specialty Service wrote this:
Update For: Monday
Posted On: Sun, 25 Oct 2009 20:04:24 GMT
EURUSD Last Price: 1.4983
[Topping] Key Level: 1.5063? Friday, the idea of an ending diagonal triangle was introduced. A correction would result in a return to the start of the diagonal at 1.4828.
EURUSD (Intraday)
Posted On: Oct 26 2009 9:14AM ET / Oct 26 2009 1:14PM GMT
Last Price: 1.5018 [Topping] Key Levels: 1.4981 The new high by the euro, by a pip, does not alter the outlook. The overlapping rise since 1.4828 is a likely diagonal triangle. Diagonals are ending patterns and warn that gains are unsustainable. We're looking for a top. A decline below 1.4981 would also offer evidence of a turn. Just a correction would likely reach the 1.4828 area...
So, technicals -- namely, Elliott wave analysis -- did see the current dollar strength a mile away. Can you always expect the same precision? Of course not; no method works every time. But you may agree that following the waves of mass psychology through market charts is better than trying to figure out the next move by staying glued to the headlines.
To read the latest Elliott wave forecasts for where the EUR/USD will likely go next, try EWI's intensive Currency Specialty Service now. (Details.)