EUR/USD Medium Term Outlook

The chart shows the movement started from 0.8563 (February 2001). As I wrote many times I think that the previous downtrend ended at this level (with a reversal triangle) and started the current very strong up-move in favor of the euro. It is obvious that the first wave from the up-move ended at 1.3664 (December 2004), followed by a corrective wave down to 1.1639 (November 2005) and subsequent resuming of the up-move i.e. we have three waves till now for the movement started from 0.8563. In my opinion all of them are corrective in nature This and the fact that I count the rise started from 0.8563 as wave [C] make me think that the movement started from 2001 is a giant terminal impulse (ending diagonal) with extended first wave. If this is the case , we should be currently in wave 3 which should be limited to 1.4800 (at this level it will be 61.8 % of wave 1). However, I think that the potential wave 3 could finish around current levels because it is developing in an upside channel which is more likely to remain unbroken. When wave 3 is over, we should see at least few months fall in wave 4 with minimum requirement overlapping of wave 1 (1.3664) and more natural target 1.3100 - 50 % retracement of wave 3, followed by another strong rise in wave 5 with potential target 1.5000. The developing of such a pattern requires time - at least a year from now so I think that it is too early to expect a reversal of the longer term uptrend started from 0.8563 and new record highs should be seen. The more interesting here is the fact that if the presented count is correct, we should see a complete retrace of the potential terminal impulse once it is over (I already wrote that this is not expected before the end of the next year). So the presented analysis suggests a reversal of the long term trend from levels around 1.5000 with a sharp sell-off below 0.8563 in the next 3-4 years. Arguments in favor of such an idea is the fact that terminal impulses are always completely retraced for a less time than they took to form and most of the times this happens for 50 % of the time needed to develop such a pattern.

Karoll Financial House