EUR/USD Following C-Wave Projection this morning….

Click here to view the PDF version


“Patience is the companion of wisdom.”

                Saint Augustine

Commentary & Analysis

EUR/USD Following C-Wave Projection this morning….

Granted, all of this stuff is so easy in hindsight.  It is just the foresight stuff which creates the problems.  That being said, I want to show you how thinking in A-B-C wave terms may have helped project the move down in EUR/USD we have just witnessed.

Let’s keep it simple and go to daily chart for EUR/USD:


…as you can see I have drawn an A-B-C on the chart.  Keep in mind the C-wave extension is most often 1.00 or 1.618 times the length of Wave A; there are other ratios to consider (next favorite is 2.618), but 1.0 and 1.618 seem targets most often achieved before a correction sets in…also keep in mind the C-Wave extension target is drawn once you believe (you never know) a B-wave has met the criteria for completion (notice the B-Wave retracement in the chart above was text book at 38.2% of the A-Wave).  If you were conservative, you would have waited for a break of the A-Wave swing low at 1.3497 before entering this trade.  And if you had confidence in your extension target, you would have expected a decent risk/reward setup, even being conservative. 

So in effect this process can give you a roadmap; it can allow you to enter a trade conservatively, or stay a trade you already entered instead of grabbing gains too early.  I said “help,” as letting something run when you are sitting on a big open profit isn’t easy. 

“A trader, in addition to studying basic conditions, remembering market precedents and keeping in mind the psychology of the outside public, as well as the limitations of his brokers, must also know himself and provide against his own weaknesses.”

                                                            Larry Livingston (fictional Jesse Livermore)

Let me re-iterate this A-B-C stuff is no Holy Grail.  But I do think it can be a useful tool if applied with some degree of consistency and discipline.  But understanding its limitations is important. 

Do I think EUR/USD goes lower?  Yes I do.  So I don’t want to lose my position even though I do want to peel some profit off here. 

I started thinking about Old Man Partridge from Reminiscences of a Stock Operator; which is arguably the best book about trading every written.  The reason is a gentleman who was sampling my service wrote to say there were too many twists and turns in my updates, which made it difficult for him to follow (he was right as I update hourly charts in the service and in a volatile market it really is updating randomness at times).  He said he takes a position for a reason and just sits and is willing to experience a large drawdown if he is confident about his positon.  A wise man I think. 

So, I went back to Reminiscences and re-read the section about Old Man Partridge (OMP).  The setting is Old Man Partridge sitting in a broker’s office watching the stock quotes…Elmer is trying to get Old Man Partridge to sell his stock because he knows a correction is coming:

OMP: …But I couldn’t do that.

Elmer: You couldn’t.

OMP: No, I couldn’t.

Elmer: Why not?

OMP: Why, this is a bull market!

Elmer: I know it is a bull market as well as you do.  But you better slip them that stock of yours and buy it back on a reaction.  You might as well reduce the cost to yourself.

OMP: My dear boy, my dear boy, if I sold that stock now I’d lose my position: and then where would I be.

Elmer: [Throws up his hands in discuss…I give him a tip and he doesn’t listen….]

OMP: …I said I’d lose my position.  And when you are as old as I am and you’ve been through as many booms and panics as I have, you’ll know that to lose your position is something nobody can afford; not even John D. Rockefeller.  I hope the stock reacts and that you will be able to repurchase our line at a substantial concession, sir.  But I myself can only trade in accordance with the experience of many years.  I paid a high price for it and I don’t feel like throwing away a second tuition fee.

My point in sharing Mr. Partridge is as warning; remember A-B-C is a trading technique.  Sometimes when we get caught up in techniques which tend to work we think we can forecast perfect targets.  And when we do that, we end up getting cute and losing excellent positions that would have otherwise made us a bunch of money if we weren’t so antsy about trading (or playing that slot machine on our desk as Ed Seykota once wisely said). 

Over the longer term, this stuff is still about business conditions.  And now, business conditions seem to clearly favor the US dollar.

Have a great weekend.

Jack Crooks

President, Black Swan Capital

Twitter: @bswancap