2018 has so far been a terrible year for EUR/USD bears and the month of October made no exception. The pair climbed to 1.1815 in late-September, but could not maintain the positive momentum. By October 31st it was down to 1.1302, losing over 300 pips that month alone. But in the Forex market traders cannot rely on trends to continue for very long.
On the second day of November EUR/USD is looking much better following a recovery to 1.1445 so far. Where did the bulls come from and could their reappearance be predicted? The Elliott Wave Principle holds the answer to both questions.
The chart below was sent to subscribers as a short-term update on Wednesday, October 31st. It shows the bullish reversal did not come out of the blue and recognizing a single Elliott Wave pattern was enough to put traders ahead of it.(some marks have been removed for this article)
The pattern in question is called an impulse. It consists of five sub-waves, labeled i-ii-iii-iv-v on the above-shown chart. Waves i, iii and v move in the direction of the larger pattern, while waves ii and iv – against it. The third wave is usually the longest. The first and the fourth wave must not overlap. As you can see, the market has followed all these rules and guidelines while drawing this five-wave impulse on the 30-minute chart of EUR/USD.
According to the theory, every impulse is followed by a reversal in the opposite direction. Since EUR/USD’s impulse was pointing south, it made sense to expect a turn to the north as soon as wave v ended. Another reason for optimism was visible on the graph of the RSI indicator, which revealed a bullish divergence between waves iii and v.
All that information made us think joining the bears near 1.1350 on the last day of October was not a good idea. Two days later today, we can now confirm it wasn’t.
We never recommend picking tops or bottoms and this example demonstrates why. Even though the analysis turned out to be correct, EUR/USD fell another 52 pips before heading in our direction. Waiting for reversals to actually occur is a much better strategy, if long-term success is your goal. Now, with the bulls already in charge, we can start taking the positive outlook more seriously.