EUR/USD Breaks Below Major Price Point
 Submitted By Michael Michaud
On January 27, the EUR/USD (exchange rate between the euro and U.S. dollar and the most widely trade forex pair) slipped below $1.40 for the first time in six months.
In other words, the dollar -- which most analysts considered all but doomed a short while ago -- now stands at a 6-month high against its main competitor. This brings to memory an interesting quote from EWI's president Robert Prechter's May 2009 Elliott Wave Theorist. Bob talks about the stock market, but it applies equally to forex:
To anyone not versed in socionomics, everything the stock market does is saturated with paradox.
— When T-bills sported double-digit interest rates in 1979-1984, investors saw no reason to abandon their T-bills for stocks; when T-bill rates were low in the 2000s, investors saw no reason to put up with the “low yield” of T-bills and sought capital gains in stocks. The first period was the greatest stock-buying opportunity in two generations, and the second period was the greatest stock-selling opportunity ever.
— When long-term bonds yielded 15% in 1981, investors were afraid of Treasury bonds even though they were about to embark on the greatest bull market ever; in December 2008, when the Fed pledged to buy T-bonds, rising prices appeared so strongly guaranteed that the Daily Sentiment Index indicated a record 99% bulls, just before prices started to fall.
— When oil was $10.35 a barrel in 1998, no one made a case that the world was running out of black gold; but when it was 7-8 times more expensive, some three dozen books came out arguing that global oil production had peaked, a theme that convinced investors to begin buying oil futures…about a year before the price collapsed 78%.
— In the second half of the 1990s, the idea that stocks would always be the best investment “in the long run” became popular just as a long period of superior returns was coming to an ignoble end. [As] of today the S&P has underperformed safe, boring Treasury bonds for the past 40 years, since 1969.
— Just when nearly everyone -- including world-famous investors -- finally panicked and conceded in February-March 2009 that the financial and economic worlds were in dire shape, the market turned around and shot upward in its fastest rally in 76 years.
Prechter's quote spells out the crucial importance of market sentiment for the trend. Ironically and paradoxically, when everyone gets utterly convinced that the trend is here to stay, that's the time to start looking for a reversal. The "surprising" turnaround in the U.S. dollar is just another example.
Now, a sentiment extreme by itself may not mark a reversal; a market can stay overbought or oversold for a long time. What helps to pinpoint a turnaround is Elliott wave analysis. If your charts show a completed Elliott wave pattern AND your sentiment indicators are pinned to the max, a change in trend shouldn't be far off.
Forex analysts blamed the latest euro weakness on "Greece’s and Portugal’s budget crises." (Bloomberg) Sounds bearish, but wouldn't it be ironic if instead of falling further, the euro would now rally? The latest short-term forecasts by our intensive Currency Specialty Service show that it's indeed likely.
No, not because things might improve in Greece or Portugal -- because the EUR/USD's Elliott wave pattern is putting in a short-term low. To find out what exactly that means for the pair, read our latest forex forecasts today.
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