On Tuesday, October 28, the euro-dollar exchange rate, known to currency traders as the EURUSD, rallied over 400 points (or pips). In a single day, the huge rally vaporized 4 full cents of the U.S. dollar's recent gains against the European currency.
Surprisingly, on Tuesday afternoon the mainstream financial media didn't have much to say about the rally. Maybe because all eyes have been fixed on the Japanese yen, the current star of the show. Or, maybe because there wasn't much in the economic news on Tuesday, period – nothing that could have reasonably explained the dollar's huge 4-cent loss.
In fact, if anything, by conventional economic logic, with the DJIA closing almost 900 points higher the same day, the dollar should have gained, not lost on October 28. Aren't rising stocks a "sign of improving economy"? And isn't the improving U.S. economy "good for the dollar"?
This is yet another example of how useless conventional explanations can be when you are trying to forecast a market. Markets are not rational – they are emotional. It's emotions, not reason, that push market trends far beyond what is considered prudent. (Remember "irrational exuberance"?) Is it any wonder, then, how often conventional logic fails to explain (or predict) a market move?
At this point you may be expecting me to say how different Elliott wave analysis is in that regard. As good as Elliott can be at anticipating market's emotional structure, it's not perfect. For example, the extent of the EURUSD's recent decline (to the Oct. 27 $1.2340 low) came as a surprise to Jim Martens, EWI's Senior Currency Strategist.
But what Jim did expect was this "surprising" EURUSD rally. On Thursday of last week, four days before it began, Jim posted this forecast for his Currency Specialty Service subscribers:
Update For: Friday
Posted On: Thu, 23 Oct 2008 17:21:00 GMT
EURUSD [Last Price]: 1.2818
[Bottoming] Allowing for a new low beneath 1.2729, the recent thrust down from a triangle warns that a bottom is near. Thrusts from triangles are terminal, in this case a fifth wave. Knowing this, and considering all the press this dollar rally is enjoying, it's probably not the time to chase the buck higher/euro lower. The "play" may be a sudden and surprising euro rally.
Jim Martens' Currency Specialty Service made that forecast last week by observing that the EURUSD's latest push lower had come out of an Elliott wave formation called a triangle (circled in red in the chart above). Triangle thrusts always resolve in the direction of the preceding trend – down, in this case – but they are also terminal moves…
As we said on these pages last week, because the EURUSD had been seeking a bottom, "bullish" news or not, it would be difficult for the buck to maintain its recent winning streak. Turns out, it didn't even take any real news "catalyst" at all for the dollar to reverse.
What's next for EURUSD? Get instant access to EWI's Currency Specialty Service.