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EURUSD: The Evolution of an Elliott Wave Count

Less than three months ago, on February 16th, the EURUSD pair climbed to a three-year high of 1.2556. Given the fact that Euro bulls have been in control during the entire 2017, it made sense to expect more strength from the European currency against the U.S. dollar. In addition, after four months of negotiations, in February Angela Merkel finally managed to form a coalition in Germany, which was also supposed to support EURUSD.

Almost three months later today, the pair is trading below the 1.2000 mark. On May 2nd, EURUSD fell to as low as 1.1938, losing over 600 pips from its February high. In this article we are not going to dwell into recent geopolitical news or events in order to find an post-factum explanation for the rate’s selloff. Instead, we will show you how the Elliott Wave Principle put us ahead of it. Also, you will see that the Elliott Wave analyst cannot and does not need to know everything in advance to stay prepared. The first of the six charts below was sent to subscribers two and a half months ago.
eurusd elliott wave count chart 1
On February 19th, EURUSD was still holding above 1.2400. But instead of buying the dip in anticipation of more gains ahead, we thought a three-wave decline was very likely, because the 4-hour chart allowed us to recognize a textbook five-wave impulse from 1.1554 to 1.2556. Knowing that according to the theory this pattern should be followed by a correction in the opposite direction was all that was needed to stay ahead of the weakness we have been witnessing since mid-February.

Of course, there was no way to predict the exact shape of the corrective pattern. The market could choose to draw a simple or a double zigzag, a regular, expanding or a running flat. It could even choose a triangle, if the bigger picture allows it. There was no point in guessing so we assigned the bears the most trivial simple A-B-C zigzag. By March 5th, we knew the market had something else in mind.
eurusd elliott wave analysis chart 2
EURUSD fell to 1.2154, but the structure of the decline looked corrective, because of a small triangle in the middle. This meant it cannot be labeled as wave A of a simple zigzag and forced us to change the labeling a little and mark it as wave W of a possible double zigzag retracement. Nevertheless, as long as the pair traded below the invalidation level at 1.2556, the odds were still in the bears’ favor. But first, a recovery to about 1.2450 had to occur in wave X. Two weeks later, we were still waiting for the bulls to reach this level.
eurusd elliott wave analysis chart 3
The resistance line drawn through the lows of waves (ii) and (iv) discouraged the bulls in wave “a” of X, but wave “c” was still missing, so it made sense to expect a new swing high before the bears return. Fast-forward to April 2nd, the 4-hour chart of EURUSD looked like this:
eurusd elliott wave analysis chart 4
Wave “c” of X took the pair to 1.2477 but not a pip higher. The bears were back right on time and there was no reason to change the count. Wave X was over and EURUSD’s selloff was going to accelerate in wave Y, or at least that is what we thought back then. “Not so fast” said the market.
eurusd elliott wave analysis chart 5
Instead of moving sharply to the downside, EURUSD found support at 1.2215 and bounced up to 1.2414. This forced us to change our perspective and accept the possibility that wave X was still in progress as a triangle correction, whose wave (e) up needs to develop before the decline resumes.

Triangles are tricky patterns, but the good news is they make key levels easy to identify. In that case, wave (e) was not allowed to exceed the top of wave (c), so 1.2414 became the invalidation level for this count. On the other hand, the negative outlook was still intact. The moment 1.2215 gives up we would know the bears were back. It happened sooner than we thought.
eurusd elliott wave analysis chart 6
The bulls never showed up for wave (e) of the triangle, so 1.2477 was once again marked as the end of wave X. EURUSD breached 1.2215 on April 23rd, opening the way for the rest of the plunge in wave Y. Less than two weeks later, the Euro was down to 1.1938 against the greenback.

Many beginners believe that once they master the Elliott Wave principle, they will be able to predict every single move the price makes.  That is not true. No matter how accurately we try to predict it, the future remains unknown. Even if the general idea is correct, the market has numerous different ways to realize it. Nobody can catch all the swings and fortunately you do not have to. Accepting the fact that you can never know anything for sure and keeping an open mind for the alternative scenarios is vital. As the situation develops, adapt to it.

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