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TECHNICAL ANALYSIS

“Elliott wave analysis helps me cut to the chase.”

Fresh insights from Elliott Wave International’s Senior Currency Strategist, Jim Martens

Technical Analysis, Jim Martens, Interview, Elliott wave, analysis, helps, me cut to the chase, fx trader, forex Jim MartensFXTM:
Jim, thanks for joining us today. The U.S. dollar has just hit its highest level in almost a month. Were you surprised by that?

JM:
The strength in the U.S. Dollar Index came as no surprise. And that’s not just me bragging. We track its Elliott wave patterns daily, even intraday. Since the dollar’s peak back in March of this year, the decline has taken a decidedly corrective Elliott wave look: The price action has been choppy, overlapping, and generally lacking direction, as you see on the circled portion of the chart below. Any time you see that on a price chart, that’s your first clue that the market must be taking a “breather” before the larger trend resumes. In this case, the larger trend has been higher, so when the dollar popped back up recently, to us it meant that the correction must be over.

For Elliott wave fans among your readers, it looks like the correction since March took the shape of a pattern called a “double zigzag,” labeled in circled green “abc”-”abc” on Chart 1.

Technical Analysis, Jim Martens, Interview, Elliott wave, analysis, helps, me cut to the chase, fx trader, forex chart 1

As you can see, we have labeled the entire correction as a wave 4 within a basic 5-wave Elliott wave pattern called an “impulse,” with wave 5 most likely starting now. So, the USDX has higher to go -- much higher, in fact, because by the looks of the Elliott wave pattern underway, the latest dollar strength is only the start of the move. We are expecting the Dollar Index to move well above 100.

And, because the U.S. Dollar Index moves inversely to the euro-dollar, looking at a EURUSD chart (Chart 2), we are expecting significant weakness in this key forex pair, well below $1.0462, the March 2015 low (chart2).

Technical Analysis, Jim Martens, Interview, Elliott wave, analysis, helps, me cut to the chase, fx trader, forex chart 2

FXTM:
How long have you been practicing Elliott wave analysis?

JM:
I probably have been following Elliott for close to 30 years now, going back to the mid-80s, when I first heard of it. Prior to that, I was using traditional forms of technical analysis: trendlines, channels, moving averages, point-and-figure, and others. What I instantly liked about the Wave Principle is that it combined all of those methods into one. Once I started to use Elliott, I realized that I no longer needed all of my old indicators, which at times even gave me conflicting signals. Instead, I could now save a lot of time and make my decisions based purely on the wave structure (or wave counts, as we call them).

Whenever I look at a chart and apply the three rules of Elliott and a few guidelines, I usually spot my favorite wave count fairly quickly. That instantly helps me determine two key points:

1) Am I bullish or bearish at that particular degree of trend, and

2) Is the market at the start of the rally (or decline), its mid-point - or at the end of the move?

That’s invaluable information for any trader, forex or any other market. Of course, Elliott waves do not exclude using supporting technical indicators. The Relative Strength Index (RSI), for example, is my favorite momentum indicator to combine with Elliott wave counts. I mostly use it when I need to confirm the end of a 5th wave. In 5th waves, the RSI starts to diverge away from price. For example, you’ll see the market rising to new highs, but the momentum is failing to confirm the rally - a typical scenario at the end of a bullish trend. But again, I only use the RSI to confirm what I already know from the wave structure.

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