Logic moves the markets, right? Supply and demand, economics and market forces are  at the cause of market movement; right? That is certainly one school of thought, however most technical annalist would tell you (myself included) that it is emotion that moves the market. The combined emotional state of the group of traders buying and selling. And that this very emotion is often very identifiable by the patterns that develop on the charts of all traded securities. Trader's emotions reveal themselves in patterns and if we study hard enough, we can learn to recognize the patterns unfolding and therefore what patterns are to follow.

Case in point this week is on the EUR/USD. I was explaining to a group of traders that I mentor that the ending diagonal that formed last week was in itself an identifiable frame where traders where in a particular state of emotion. And that the reversal signalled a change in emotion. Recognizing this helps us a great deal in speculating on where we can target a move to stall or retrace. If we look at the EUR/USD on the daily chart we can speculate that the ending diagonal is a state of emotion that is being countered by the correction that followed. So based on this, it is reasonable to anticipate a stall or re-tracement at or near the point where the previous pattern started to develop.

There are many indicators pointing right at that place now; the barrier where the diagonal began, a doji with a long tail and several standard oscillators signalling an oversold condition. In other-words we are hitting a balance now between the two opposing emotional forces.

How far the re-tracement goes or whether it fully reverses the downward move now requires good technical annalisys. What could be the emotional state of the traders next week? Here are the points we need to ponder that caused the initial reversal.

1. The EUR/USD was highly overbought for an extended period prior to the reversal.

2. Ending Diagonals typically form at the 'END' of moves that are extended.

3. The trader sentiment has turned strongly in favour of the USD.

4. There is still a large technical void down to any meaningful diagonal trend-lines.

Based on the the above, my bias is for the the EUR/USD to see lower numbers in the medium term. So I expect any move up to be corrective and that after a brief period of EURO strength the downward move will likely resume targeting the lower trend-lines. In Elliott Wave terms this move would be labelled as 'A' or as '1' for the first leg down which now appears complete. What is to follow will help determine where the trader's emotions are headed and will reveal more about how we should be counting this going forward. The next move should help reveal what patterns are likely to follow. As always, I remain open to being wrong as the most important thing all technical traders must learn is where they shouldn't be in a trade rather than where they should.

In summary, look for a re-tracement next week to be followed with renewed downward pressure.

Good trading;

Pierre Charlebois