One hypothesis is that the USD is climbing towards that downtrend line. There it will be gobsmacked (just as it was in Mar '09) and begin to drop towards the uptrend line. That's a simple approach. Before you fall over laughing, remember Occam's Razor. Simple is good. This interpretation would mean the index could reach a high of 88.70 before falling in any serious way. Here's the weekly chart:
Then, of course, we could bring in an Elliott Wave count. If one assumes wave 1 ended at 89.71 and wave 2 at 74.17, then we're in wave 3, which means it will head higher. This is a rough count with none of the nuances I spent an hour on last night but rough can be good too. This move up since Nov '09 has some of the characteristics of a third wave such as the RSI moving into overbought. Not in a straight line of course. Never in a straight line. Which brings us to how to trade the damn thing.
I don't think it would be unwise to expect a correcton. If you look at a daily chart and put an EW count on it, you run into the fact you're probably dealing with an impulsive wave that is not clear as to which wave is extending. As a result, one can number up to 9 before the impulse wave is complete. That interpretation, too, suggests that wave 8 will begin soon which would be corrective. The reason I'm moving away from labeling the daily as an ABC correction (which I did last week) is that the move up in the last few days invalidates this being a B wave. If you assume that A ended on 4/14 at 80.03 then A consisted of 3 waves—this means it was a triangle or a flat but not a zigzag since that has 5 waves. The high of today has been 84.31 (the same as yesterday) and has unfolded in 5 waves. The 5 waves preclude a flat which must be 3-3-5 and a triangle which must be 3-3-3-3-3. So we have no valid corrective wave count and still seem to be in an impulse. (This is all if you subscribe to EW theory which is less than proven but does seem to have some applicability in markets, although alas, only brilliantly in hindsight). I've put the daily below the weekly chart below.
The bottom line is that one could reasonably expect a correction to 81, the uptrend line on the daily chart. When? The simple answer is when risk aversion begins to lessen. This doesn't seem likely in the next hour or two anyway since there is so much concern over the Euro and with the general election in the UK. Perhaps after Mercury stops being retrograde on May 11th? Or when it approaches the next Gann Fan line? Both are as good as any other approach but neither has any real credibility since neither has ever been rigorously tested. Oh well. Back to watching price movement on the shorter-term charts. That tells you as much as anything and only requires discipline and awareness.
Here are the weekly and daily charts:
Daily:
© Dianne Fecteau, 2010. No part of this material may be reproduced in any form, or referred to in any other publication, without the express written permission of the author.
My purpose in writing this blog is to show you how one trader, me, makes trading decisions and survives while trading Forex. One of the biggest problems I had when I first started trading was trying to apply the “rules” to actual trades. Another was the psychology—limiting losses and letting profits run. If you study my blog, you’ll see how I deal with both those issues. So my writings are not trade recommendations but rather educational in purpose. You have to decide on your own approach to trading. Remember that trading is risky.
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