On Friday, March 26, Elliott Wave International's Short Term Update opened its euro commentary with this compelling message: "The form in the euro is one that you could use if you were to teach a course on Elliott wave analysis."
So, that's exactly what I'm going to do. This makes you, dear readers, my students for the day. And the course is Introduction to the Wave Principle: the Euro Paradigm.
Lesson One: Sentiment. The Wave Principle teaches that extreme measures of investor psychology often occur at major turning points in a market. What defines "extreme," you might ask? It's when nearly every single passenger on the sentiment ship gets up and moves over to one side so that the boat is certain to tip over.
Now, nothing illustrates this imbalance better than the euro fever of November 2009. Back then, daily sentiment readings for the currency rose to a whopping 93% bulls, matched only by these (and countless more) one-sided reports of the mainstream press:
- "The euro appears poised to continue its ascent against the dollar and smart investors can use options to protect from this." (AP)
- "Dollar Slump Persisting As Top Analysts See No Bottom... Analysts say the euro would not likely budge far from the $1.50 mark for many months. As long as the Fed maintains interest rates at historical lows, the EUR-USD should return on a bullish trend." (Reuters)
- "Euro appreciation is a mixture of positive economic data, rising risk appetite, and a weak dollar. The euro is still clearly biased to the upside." (International Business Times)
YET -- just as the anti-U.S. dollar sentiment reached fever pitch, on November 26 the euro lost its "upside bias." From there, the currency fell out of orbit in a violent, four-month selloff to the near one-year low we see today. In other words: the sentiment boat tipped over.
On to Lesson Two: Wave Structure. No matter how powerful the other technical readings may be -- of sentiment, time cycles, momentum, and the like -- to an Elliottician, no analysis is complete without a compelling Elliott wave pattern. And, in the days leading up to the euro's peak, EWI's analysts saw just that. To wit: the November 20, 2009 Short Term Update presented the following close-up of the Euro that showed a nearly completed five-wave rally from March 2009 and wrote:
So far, "traders have not yet been ready to take euro prices lower. But this may change soon. Our view implies that the euro's eight-month rise is either over or will be complete after one final brief upward spike and subsequent reversal. A decline beneath __ that is sustained will confirm that the euro's remaining bullish potential has been eliminated."
So there you have it -- a brief lesson in Elliott wave analysis care of the euro's recent price action. Now, you can apply what you've learned to the euro charts and commentary in our Financial Forecast Service publications AND see where the currency could be in the days, weeks, and years to come.