Friday, May 15, 2009

How to Apply Elliott Wave Analysis to Forex

Charts. That's what Elliott wave analysis is all about: Looking at charts, in different time frames, in search of clear Elliott wave patterns. Once you've found one and figured out what part of the pattern your market is in, you can make a reasonable forecast where the market will go next.

What does that mean in practice? Here's a good example. On Wednesday, May 13, the editor Elliott Wave International's intensive Currency Specialty Service Jim Martens posted the following Market Insight for his subscribers.

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Market Insight
Posted On: Wed, 13 May 2009 00:59:32 GMT
Jim Martens, editor, Currency Specialty Service

In recent updates I've suggested sterling may prove the weak currency of the group. In our regular work, we look at sterling relative to the euro and the U.S. dollar. To reach the conclusion that sterling will be the weakest of the bunch, you have to compare it to a number of its competitors.

Readers already know that we view the GBP recovery underway since January as a correction. In EURGBP we're following a possible bullish triangle. Moving beyond our regular coverage, let's look at the British pound relative to the Swiss franc, yen and New Zealand dollar.

The first chart reveals sterling has been weak relative to the yen and that the decline underway since July 2007 is incomplete. The recent rebound representing wave four of three, [with another push lower likely ahead.

Against the Swiss franc, sterling did gain at the start of the year. But the structure of the recovery is corrective, in three waves, and unlike against the dollar, sterling has not extended its gains above the peak established in February, leaving the December-to-February recovery as the dominant pattern.

Lastly, against the New Zealand dollar, all sterling has managed this year is a consolidation. Because sterling was falling before the triangle that you see in this chart was formed, it's likely to thrust down once the triangle pattern is complete.

Bottom line: Looking at these three crosses, it's clear that sterling is likely to prove weak against most, if not all, of its competitors.

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