by Nico Isaac
Updated: May 20, 2016
Investors and traders are familiar with the expression, "the trend is your friend."
But have you heard this one -- "the Fed is your friend"?
Probably not, considering I just made it up. But while the exact phrase hasn't made it into the financial zeitgeist... yet, its meaning definitely has: For example, regarding the world's most popular forex market: the euro/U.S. dollar currency pair (EURUSD)
So goes the logic: When it comes to navigating the trend changes in the EURUSD, price action depends on the Fed's monetary policy.
Take, for example, the day of May 3.
That morning, the euro clocked its longest winning streak against the U.S. dollar since December... December of 2014, that is -- having soared 6.7% since the start of 2016.
Here's the commit-to-memory part: According to the mainstream experts, the euro had the uptrend in the bag courtesy of one single factor -- namely, hints that the U.S. Federal Reserve would delay raising rates for the rest of the year.
Wrote one news source:
"Higher interest rates would, in theory, lead to a stronger dollar by increasing the return on dollar-denominated assets." (May 3 Bloomberg)
"It's becoming clear that the Fed is not in much of a hurry to raise interest rate even though it did once. If you're a dollar bull, you've got to sit on the sidelines until the Fed signals that they're going to hike again this year. Otherwise, you risk getting run over by the steam roller." (May 3 MarketWatch)
So, what happened?
On May 3, the EURUSD turned down (i.e. falling euro, rising U.S. dollar) in a powerful reversal to two-month lows on May 20.
We have a one idea as to why the euro failed to follow its Fed-led script -- It's called market psychology, which unfolds in recognizable Elliott wave patterns on the market's price chart and whose changes do not depend on the news, or the Fed
Recall: On May 3, mainstream strategists issued this word of advice: Dollar bulls sit on the sidelines and wait for the Fed to raise hikes, else "get "run over by the steam roller."
On that same day -- May 3 -- our Currency Pro Service assessed the Elliott wave patterns on the EURUSD price chart and gave a very different opinion: Dollar bulls should actively prepare for a move... to the upside! (i.e., falling EURUSD)
"Price has tagged the 2.618 Fibonacci projection for wave (iii) and will have traveled .618 times the distance of wave ((a)) at 1.1612, however, it will take a drop below 1.1522 to signal wave (iii) has peaked and wave (iv) of ((c)) is underway.
"EURUSD has dropped by more than a figure (100 pips) from its high on the day. The result is a possible reversal day... A rebound that ends after three waves and below 1.1615 would be viewed as a correction and a bearish opportunity."
The next chart shows how the EURUSD, while defying its Fed-led script, followed its Elliott wave script to a t:
No method of financial forecasting is 100% fool-proof. But what sets Elliott wave analysis apart is its objectivity in assessing the highest-probability, lowest-risk trade set-ups in the markets you follow.