Wave structure is the very basis of Elliott wave analysis. To an Elliottician, every seemingly "random" wiggle on a market chart fits into an Elliott wave pattern. The 13 known patterns are divided into two broad groups: impulsive and corrective. Impulses develop as 1-2-3-4-5 and indicate the direction of the larger trend, while A-B-C corrections go against that trend.
Corrections follow impulses, just as this idealized diagram shows for a bull market. (For a bear market, flip the chart upside down). And another thing to remember is that waves are fractal -- that is, self-repeating on all degrees of trend:
Simple enough, right? Now let's look at the recent action in the EUR/USD, the most widely traded forex pair, as an example of how you can put this information to practical use in currencies.
Before the EUR/USD reversed on November 26, EWI's intensive Currency Specialty Service had been looking for a top. To understand why, take a look at this chart copied from the Service's latest, December 28, daily forecast page:
As you can see, by November 26, the EUR/USD was finishing an upside impulse (1-2-3-4-5), so the market was due for a reversal. When the USD took the upper hand (to the surprise of the dollar bears), the EUR/USD promptly lost more than 900 pips -- or 9 cents! From the recent low near $1.42, the pair has rebounded -- but is this a start of a move to new highs (i.e., a weaker dollar, stronger euro), or just a pause on the way to lower lows?
Remember that waves are fractal. So, let's "zoom in" on the structure of the rebound off the $1.42 low: Is it impulsive or corrective? This 90-min chart from the same December 28 daily forecast answers that question. What looks like a sharp rally on the daily chart, on a shorter time frame turns out to be an overlapping, sideways move -- a correction! (See this chart fully labeled inside Currency Specialty Service now.)
The corrective structure of the EURUSD's recent bounce has profound implications for the larger trend -- bearish implications, to be exact. Is this upward correction already over? Where could the reversal occur? Get answers now inside EWI's intensive Currency Specialty Service.