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The Implications of a Double Combination

One of the most common patterns under the Elliott Waves Theory, a double combination involves two simple corrective waves connected by an intervening segment. It appears in various places – the second wave of an impulsive move, wave a of a triangle, etc. 

The coronavirus crisis brought a strong demand for dollars. Investors rushed into the USD safety and sent it higher across the board while the stock market lost over 30% of its value.

However, as time passes, the USD loses its steam and reversal patterns form on various charts. EURUSD, for instance, seems to have ended a double combination pattern that originated two years ago. At that time, the pair traded well above 1.20, could history be about to repeat and threaten such levels again?

Did the EURUSD Hit the Bottom?

Until the recent triangular consolidation at the end of the double combination, the price action on the EURUSD pair saw little or no bounces. In fact, no segment retraced more than 61.8% of the previous market swing, making it difficult for traders to have a contrarian view.

As it turned out, for the last two years, picking a bottom for the EURUSD pair has been a difficult task. Could it be that the recent move to the 1.07 area is the new bottom for the near term future?

The double combination that channels against the 0-x trendline is key. The recent move above 1.10 that followed the ECB press conference the other week met resistance at the 0-x trendline. The reaction from the dynamic resistance was so strong that the pair fell two hundred points in an almost vertical move.

However, the bullish technical case here looks compelling. Measured from its high to low, the market already retraced 61.8% of the move to the 0-x trendline.

According to the Elliott Waves Theory, the 50%-61.8% retracement is the perfect place to enter for the extended third wave. If that is the case, the EURUSD may move above 1.10 sooner rather than later.

Almost a century ago, Ralph Elliott believed that markets move for a reason. Moreover, when they move, they move in waves, forming patterns and cycles of various degrees. The system he created uses impulsive and corrective patterns to explain the market’s behavior.

If the double combination presented here holds, then the EURUSD pair ended a bearish trend that took over two years to form.

What lies ahead might not be so bearish after all.