As explained in our general overview, EUR/USD has entered into a corrective wave 4 to the major wave down (3). For the moment we are trading into wave D, which we expect to test the lower line of the triangle by May 2016 (according to Fibonacci Time Zones). Now let us consider the highlighted wave in more details so we can find a trade setup with a favorable risk-reward ratio.
We believe the red count (a-b-c) is in tack and as long as the low established by (a) is not breached, EUR/USD may reach higher to the red count (b) on 50% retracement, or to (b2) and (b3) alternative counts respectively in 61.8% and 76.4% Fibo Retracements. We have projected 3 possible (c) waves, which are color coded accordingly dependent on where (b) wave is going to top.
The most likely outcome is the green count (b2 & c2) for 3 main reasons:
- (b2) is 61.8% retracement of (a) wave, a common retracement for (b) waves
- (b2) corresponds to 100% extension of (1-2-3-4-5) with (A-B-C), which are both waves within the bigger (b) wave.
- (c2) is the price level which tests the lower line of the triangle we have discussed in the first chart and (c2) = (a)
Even if the green count is invalidated and the red or blue count takes place, they are also acceptable as none of them invalidates our important levels.
We are currently long in 1.0955, in the level where C is at 100% extension of A. Even though price cut through 1.0955 and made a low at 1.0953, it rebounded immediately and now we are in the money.
Stop Loss =1.0820
Target 1(b) = 1.1100
Target 2 (b) = 1.1165 (Most Likely)
Target 3 (b) = 1.1248
In case of invalidation (Stopped out of the trade):
Even though not advisable, look to enter long again around and 1.0800 with a Stop Loss at 1.0775.
Unlikely but still a scenario on the table: In case 1.0820 is breached then wave (b) has topped and we should expect the start of wave (c) which may reach even lower than we have projected above.