Home—Online trading—Spread betting explained—Spread betting blog—Combining Fibonacci and Elliot waves in the euro
Feb 08, 2013, 04:02
Posted byJohn C Burford
The euro is crying out for coverage, since it has been rallying into major target areas recently.
On 25 January, I noted that the market had reached the important 50% Fibonacci level (see chart below).
Not only that, the Commitments of Traders (COT) data showed that the speculators were piling into the long side with abandon.
That was just one of the reasons I was wary of further gains.
(Click on the chart for a larger version)
However, I also noted that the trend was still up, and that was the correct direction to trade – as of then.
The rally did continue and surged to the 1.37 level on 1 February, just missing the next Fibonacci level at 62%:
The A-B-C pattern was still valid, which meant I was looking for a top and a resumption of the bear market.
Also, the large potential negative-momentum divergence was still in play (red bars). This was a potentially bearish sign, of course.
But this week, the market has plunged right back down below my central tramline. This is important, since it indicates my tramlines are much less valid.
I must look for another set and abandon this one! Remember, tramlines do not live forever.
Claim your FREE report: The six-step game-plan for
spread betting profits
Another interesting feature is this: although the 1.37 top missed the Fibonacci 62% level using the current pivot points, see what happens if, instead of using the May 2011 top as my high pivot point, I use the next high:
My high pivot point is now the wave 2 high of the major bear market five-wave pattern – and I score a direct hit on the Fibonacci 62% retrace!
Trader tip: When looking for Fibonacci pivot points, if you believe you have a five-wave pattern that obeys all of the Elliott wave rules (as this one does), play with the wave 2 high/low and draw in an alternative Fibonacci set. This is an important area I teach in depth in my workshops.
So now, since the May 2011 top, I have a five-wave pattern down, followed by a three wave A-B-C pattern up.
This is textbook Elliott wave behaviour, and indicates the larger trend is down.
If last Friday’s 1.37 is the C wave top, what is the prognosis for the likely extent of the move down?
Let’s have a look at the latest COT data as of 29 January:
Totally predictably, the speculators have increased their long positions, while the commercials have taken the other side of the bet.
So the trap has been sprung on the euro bulls!
Interestingly, the huge sell-off yesterday supposedly was prompted by a remark that Mario Draghi, the ECB president made. I took the trouble to read what he had to say. It was total central bank nudge nudge, wink wink language. He must have taken lessons from Alan Greenspan, the master of arcane pronouncements.
No, the real reason the market fell heavily was the excess of bullish sentiment which tipped the boat over.
Now, let’s look at the hourly chart:
I have a superb central tramline with several touch points which was well and truly broken yesterday. My upper tramline likewise is excellent, with a nice prior pivot point (PPP) and the two major highs.
That means my equidistant lowest tramline is my next target.
Yesterday’s sell-off was impulsive, and that makes me think we are in a third wave (green bars), which could end at or around the lowest tramline.
But first, the market should be able to stage a bounce from current levels since it is hitting a support zone (pink bar). It may even attempt a rally back to the underside of the central tramline in a traditional kiss. I shall be on the lookout for this.
Of course, the market may decide to plough right through this support and make a dash for the lowest tramline.
The alternative scenario is that the move off the 1.37 high is a three-wave A-B-C, implying a resumption of the uptrend. But without a positive-momentum divergence, I am less inclined to this view, although a valid one.
• If you’re a new reader, or need a reminder about some of the methods I refer to in my trades, then do have a look at my introductory videos:
The essentials of tramline trading
Advanced tramline trading
An introduction to Elliott wave theory
Advanced trading with Elliott waves
Trading with Fibonacci levels
Trading with 'momentum'
Putting it all together
• Don't miss my next trading insight. To receive all my spread betting blog posts by email, as soon as I've written them, just
sign up here
. If you have any queries regarding MoneyWeek Trader, please contact us here.
Published in Spread betting blog
More articles by John C Burford
By John C Burford, May 24, 2013
By John C Burford, May 22, 2013
By John C Burford, May 20, 2013
By John C Burford, May 15, 2013
Leave a comment
(08 February 2013, 05:30PM)
Complain about this comment
"The euro is crying out for coverage, since it has been rallying into major target areas recently."John, it's the Dow that is crying out for coverage, since it has been rallying into major target areas recently.
This will be the name displayed with your comment.
This helps us verify comments are genuine. It will not be displayed anywhere on the site and is stored confidentially.
Please keep your comment within 1,000 characters and relevant to the main topic. We encourage healthy debate, but we don't allow insults or bad language. Anything off topic or unpleasant, we'll remove. Enjoy the conversation! Thank you.
To prevent spam-related comments please enter the characters shown in the 'Captcha' box to the left.
Enter the text from the box above
Remember my details
By leaving a comment you accept our terms and conditions.
The trades on this blog are all 'closed', past trades. These aren't trades for you to copy, they are there to teach you some useful trading tactics for your own spread betting. And always remember: spread betting carries a high risk to your capital as you can lose more than your original stake.
Cut through the trading jargon with MoneyWeek's easy to understand guide to spread betting terms
In his easy-to-understand video tutorials, John C Burford outlines some of the essential concepts you need to know to become a successful spread better
24 May 13
22 May 13
20 May 13
Compare the leading providers' online trading accounts for spread betting, forex trading, share dealing and CFDs, and open an account online. Plus, get MoneyWeek's tips and advice on trading online.
Copyright © MoneyWeek 1999-2013. All rights reserved.
Registered office: 8th Floor, Friars Bridge Court, 41-45 Blackfriars Road, London SE1 8NZ.Registered in England with company no. 04016750 and VAT no. GB 629 7287 94. MoneyWeek and Money Morning are registered trade marks.