Editor of Elliott Wave International's forex-oriented Currency Specialty Service Jim Martens recently shared this important observation with subscribers:
Since May, sentiment [towards the U.S. dollar] has turned 180 degrees. In May, just before the euro bottom, the focus was on the troubles in Greece and the coming issues Spain and Portugal. Listening to the press [at that time], the euro could go nowhere but lower. Six months later, the story is QE2 -- and the only outcome is a falling dollar. This is a perfect example of how the news reaches an extreme and is widely accepted just as a turn that goes against the expected outcome occurs. This time, the bearish dollar news is actually bullish.
Jim was right. Since early November, when the Fed announced the second round of quantitative easing (QE2), the U.S. dollar has trended upward. The EUR/USD, the euro-dollar exchange rate and most actively traded forex pair, fell from near $1.43 then into the $1.29 range this week. That's a U.S. dollar gain of 13 cents (9%) so far.
Almost no one expected that. As Jim explained, a month ago the mainstream analysts and even the public had all but written off the USD. How can forex markets be so illogical?
The truth is, they are only "illogical" if you expect them to unfold according to the logic of "fundamental analysis."
When markets fall, "fundamentals" explain why they "should" be falling. When prices start to rise, analysts switch to reasons to be bullish. When you simply extrapolate the current trend forward like that, you get caught by surprise when the trend changes. As this example shows, the "fundamental" logic told you to sell EUR in June and USD in early November -- in both instances, selling at the bottom of the trend.
Elliott wave analysis, on the other hand, helps you stay ahead of the trend. When you track wave patterns in market charts, you can actually calculate probable price targets where the trend may reverse. For example, here is a forecast Currency Specialty Service posted on Friday, November 26 (some chart labeling removed for this article):
Update For: Monday
Posted On: Fri, 26 Nov 2010 19:32:48 GMT
EURUSD Last Price: 1.3236
[Lower] The alternate Elliott wave count... allows for weakness toward 1.3235 or even 1.2952, where wave (C) would equal wave (A)."
The EUR/USD touched $1.2975 on November 30, just a few pips away from the ideal Elliott wave target from the forecast above. But have you noticed that the sentiment is again getting extreme -- against the euro, this time? Says Currency Specialty Service editor Jim Martens:
A few articles calling the longevity of the euro into question have surfaced, and that's a reason to watch the market closely. Keep in mind that over the past year turns have occurred just as news reached an extreme. Every turn has gone against the consensus, and it's vital to watch the [Elliott wave] structure of a dollar setback, should one occur.