Defining the Correction, and Finding Its End!

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“The harder you work, the luckier you get.”

         Attributed to Gary Player (among others)

FX Trading –Defining the Correction, and Finding Its End!
Jack’s been running around speaking at various currency tours and seminars this year. And there’s one line he likes to use when conveying the uncertainty of trading in any market …

“It’s better to be lucky than good.”

In other words, when we’re trading our money and effectively have our clients’ money on the line, we’ll take lucky any day if it means we, and our members, are making money. Being ‘good’ doesn’t always equate to success in a market environment.

Still, we put a lot of effort into being good since luck tends to follow closely with good-quality, honest work.

So in our latest prediction, we weren’t exactly satisfied of the outcome. We opened ourselves to the possibility that the US dollar was due for a substantial multi-week correction – driving the dollar notably lower to the benefit of its counterparts. Turns out our effort to predict a US dollar correction has thus far fallen well short of the success we’ve implied in being ‘lucky’ and misses out on the ‘good’ too.

So maybe we dig in deeper and hope to shovel out some luck as the currencies continue on in a way the market dictates. To us, that could mean the US dollar correction as we know it is done and over; or it could mean more hours or days spent on determining when the primary trend will resume.Here’s something that might help …

First, A.J. Frost and Robert Prechter sum up corrective trends (among other things) rather nicely in their book, Elliot Wave Principle: Key to Market Behavior. Here’s an excerpt:

“… It can be difficult at times to fit corrective waves into recognizable patterns until they are completed and behind us … you must exercise more patience and flexibility in your analysis when the market is in a meandering corrective mood than when prices are in a persistent motive trend.”

Tell me about it!

Now, with that said, we can go back through and revise our expectations. But because of the way currencies are behaving, we haven’t exactly seen any clear signals that the primary trend has resumed or that a substantial retracement will occur.

What we’re experiencing right now is a US dollar correction, albeit of much smaller magnitude than we had been expecting. It’s what Mr. Frost and Prechter refer to as a ‘flat correction’.

The main difference here is obviously the extent of the retracement. But our point is, even though we didn’t exactly see what we’d been expecting (as far as this correction goes), we may have already gotten just what the market ordered.

Looking now at a chart of the US dollar index, we can see the flat correction that’s played out:

And getting even further into the Elliot Wave Principle as discussed by Frost and Prechter, this particular flat correction has taken on another characteristic useful in determining/forecasting price action. They call it a contracting triangle within a bull market. Completion of this pattern typically results in a powerful breakout consistent with the primary trend.

As we try to meld this thinking into the current market environment, the potential for the US dollar to embark on its next leg upward grows stronger. The rest of the pack of major currencies reacted poorly to China’s economic stimulus news. Yesterday bred a dramatic reversal in the dollar’s favor. The idea of a major global slowdown is gaining wide acceptance.

As I finished up this morning the euro is dropping sharply lower. And most of the other majors are following suit.

Be nimble out there.