EURUSD sold off to 1.0332 earlier today after weak Eurozone economic data led traders to raise their bets on a big rate cut by the ECB. This drop comes on the back of a bigger selloff from 1.1214, which has been accelerated by Donald Trump’s election victory earlier this month. Needless to say, we had no prior knowledge of the election outcome or future economic reports. The EURUSD selloff, however, made perfect Elliott Wave sense.
Let us explain by starting with the 4h chart below, shared with our EW Pro readers on September 23rd, 2024.
Two months ago, EURUSD was approaching the 1.1200 mark. Assuming a five-wave impulse was going to form, we thought that its wave ‘iii’ was almost over, so it made sense to expect a pullback in wave iv, before the bulls can return in wave ‘v’ of i). By the time we published our October 7th analysis, the pair was already down to 1.0975.
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Elliott Wave analysis, as any other analytical method should be, is governed by rules, which, if broken, tell the analyst that the initial idea was wrong. One such rule states that the first and the fourth waves must not overlap in an impulse pattern. This allowed us to identify 1.0916 as the invalidation level the bulls must protect in order to survive. They failed at this task, which was a clear signal that something else was going to happen. To find out what, we zoomed out to the daily price chart of EURUSD, published in our October 14th analysis.
What we thought was wave ‘iv’ turned out to be part of the first wave of a larger move to the downside. By waiting to see if 1.0916 would hold, we sacrificed a small part of that move, in order to gain confidence in the big picture negative outlook, which until then was just an alternative to keep in mind. That big picture outlook implied a lot more weakness to under 1.0400 in wave (c) of a corrective combination in wave II, as long as EURUSD traded below 1.1214. The rest, as they say, is history.
1.1214 was never threatened and as the bad news for the European Union kept piling up, EURUSD kept falling. Knowing who will be president, how would the Ukraine war develop or what the economy would do was not necessary, not to mention that these things were next to impossible to predict. But knowing the rules of Elliott Wave analysis and what it means when they’re broken was enough to put traders ahead of the EURUSD crash.
Pretending to know what will happen from the start is counter-productive. Flexibility is key in financial markets. When the facts change, our opinion must follow. In terms of Elliott Wave analysis, this means changing our count whenever the market inspires a better idea.
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